[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]






ANSWERING THE ADMINISTRATION'S CALL FOR POSTAL REFORM--PARTS I, II, AND 
                                  III

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

                                HEARINGS

                               before the

                        SPECIAL PANEL ON POSTAL
                          REFORM AND OVERSIGHT

                                 of the

                              COMMITTEE ON
                           GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

                  JANUARY 28, FEBRUARY 5 AND 11, 2004

                               __________

                           Serial No. 108-135

                               __________

       Printed for the use of the Committee on Government Reform


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



93-087              U.S. GOVERNMENT PRINTING OFFICE
                            WASHINGTON : 2003
____________________________________________________________________________
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                     COMMITTEE ON GOVERNMENT REFORM

                     TOM DAVIS, Virginia, Chairman
DAN BURTON, Indiana                  HENRY A. WAXMAN, California
CHRISTOPHER SHAYS, Connecticut       TOM LANTOS, California
ILEANA ROS-LEHTINEN, Florida         MAJOR R. OWENS, New York
JOHN M. McHUGH, New York             EDOLPHUS TOWNS, New York
JOHN L. MICA, Florida                PAUL E. KANJORSKI, Pennsylvania
MARK E. SOUDER, Indiana              CAROLYN B. MALONEY, New York
STEVEN C. LaTOURETTE, Ohio           ELIJAH E. CUMMINGS, Maryland
DOUG OSE, California                 DENNIS J. KUCINICH, Ohio
RON LEWIS, Kentucky                  DANNY K. DAVIS, Illinois
JO ANN DAVIS, Virginia               JOHN F. TIERNEY, Massachusetts
TODD RUSSELL PLATTS, Pennsylvania    WM. LACY CLAY, Missouri
CHRIS CANNON, Utah                   DIANE E. WATSON, California
ADAM H. PUTNAM, Florida              STEPHEN F. LYNCH, Massachusetts
EDWARD L. SCHROCK, Virginia          CHRIS VAN HOLLEN, Maryland
JOHN J. DUNCAN, Jr., Tennessee       LINDA T. SANCHEZ, California
JOHN SULLIVAN, Oklahoma              C.A. ``DUTCH'' RUPPERSBERGER, 
NATHAN DEAL, Georgia                     Maryland
CANDICE S. MILLER, Michigan          ELEANOR HOLMES NORTON, District of 
TIM MURPHY, Pennsylvania                 Columbia
MICHAEL R. TURNER, Ohio              JIM COOPER, Tennessee
JOHN R. CARTER, Texas                CHRIS BELL, Texas
MARSHA BLACKBURN, Tennessee                      ------
------ ------                        BERNARD SANDERS, Vermont 
                                         (Independent)

                       Peter Sirh, Staff Director
                 Melissa Wojciak, Deputy Staff Director
                      Rob Borden, Parliamentarian
                       Teresa Austin, Chief Clerk
                      Brien Beattie, Deputy Clerk
          Phil Barnett, Minority Chief of Staff/Chief Counsel

              Special Panel on Postal Reform and Oversight

                   JOHN M. McHUGH, New York Chairman
DAN BURTON, Indiana                  DANNY K. DAVIS, Illinois
EDWARD L. SCHROCK, Virginia          MAJOR R. OWENS, New York
CANDICE S. MILLER, Michigan          EDOLPHUS TOWNS, New York
TIM MURPHY, Pennsylvania             CAROLYN B. MALONEY, New York
MARSHA BLACKBURN, Tennessee          WM. LACY CLAY, Missouri
                          Robert Taub, Counsel
                        Jack Callendar, Counsel


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    January 28, 2004.............................................     1
    February 5, 2004.............................................   125
    February 11, 2004............................................   263
Statement of:
    Burrus, William, president of American Postal Workers Union, 
      AFL-CIO; William H. Young, president of National 
      Association of Letter Carriers; Dale Holton, president of 
      National Rural Letter Carriers Association; and John 
      Hegarty, national president of National Postal Mail 
      Handlers Union.............................................   130
    Fineman, David, chairman, U.S. Postal Service Board of 
      Governors, accompanied by John E. Potter, Postmaster 
      General of the United States...............................    28
    Hess, Lester, chairman, Grand Lodge Advisory Committee, 
      Benevolent and Protective Order of Elks; Hamilton Davison, 
      chief executive officer, Paramount Cards, Inc.; Rebecca 
      Jewett, president and chief executive officer, Norm 
      Thompson Outfitters, Inc.; and Gary Mulloy, chairman and 
      chief executive officer, ADVO, Inc.........................   366
    Olihovik, Walter M., national president of the National 
      Association of Postmasters of the United States; Steve D. 
      Lenoir, president of the League of Postmasters; and Vincent 
      Palladino, president of the National Association of Postal 
      Supervisors................................................   198
    Omas, George A., chairman, U.S. Postal Rate Commission.......    56
    Roseboro, Brian C., Acting Under Secretary for Domestic 
      Finance, Department of the Treasury........................    20
    Smith, Fred, chairman and chief executive officer, FEDEX; Ann 
      Moore, chairman and chief executive officer, Time Inc.; 
      Michael Critelli, chairman and chief executive officer, 
      Pitney Bowes; William Davis, president and chief executive 
      officer, R.R. Donnelley & Sons; and Nigel Morris, co-
      founder and vice chairman, Capital One.....................   284
    Walker, David M., Comptroller General of the United States...    72
Letters, statements, etc., submitted for the record by:
    Burrus, William, president of American Postal Workers Union, 
      AFL-CIO, prepared statement of.............................   135
    Burton, Hon. Dan, a Representative in Congress from the State 
      of Indiana, prepared statement of..........................   274
    Clay, Hon. Wm. Lacy, a Representative in Congress from the 
      State of Missouri, prepared statement of...................    11
    Critelli, Michael, chairman and chief executive officer, 
      Pitney Bowes, prepared statement of........................   309
    Davis, Chairman Tom, a Representative in Congress from the 
      State of Virginia, prepared statement of.................120, 271
    Davis, William, president and chief executive officer, R.R. 
      Donnelley & Sons, prepared statement of....................   324
    Davison, Hamilton, chief executive officer, Paramount Cards, 
      Inc., prepared statement of................................   390
    Fineman, David, chairman, U.S. Postal Service Board of 
      Governors, prepared statement of...........................    32
    Hegarty, John, national president of National Postal Mail 
      Handlers Union, prepared statement of......................   170
    Hess, Lester, chairman, Grand Lodge Advisory Committee, 
      Benevolent and Protective Order of Elks, prepared statement 
      of.........................................................   368
    Holton, Dale, president of National Rural Letter Carriers 
      Association, prepared statement of.........................   163
    Jewett, Rebecca, president and chief executive officer, Norm 
      Thompson Outfitters, Inc., prepared statement of...........   402
    Lenoir, Steve D., president of the League of Postmasters, 
      prepared statement of......................................   229
    Maloney, Hon. Carolyn B., a Representative in Congress from 
      the State of New York, prepared statement of...............    14
    McHugh, Hon. John M., a Representative in Congress from the 
      State of New York, prepared statement of...................     4
    Miller, Hon. Candice S., a Representative in Congress from 
      the State of Michigan, prepared statement of...............   121
    Moore, Ann, chairman and chief executive officer, Time Inc., 
      prepared statement of......................................   301
    Morris, Nigel, co-founder and vice chairman, Capital One, 
      prepared statement of......................................   342
    Mulloy, Gary, chairman and chief executive officer, ADVO, 
      Inc., prepared statement of................................   412
    Olihovik, Walter M., national president of the National 
      Association of Postmasters of the United States:
        A NAPUS Action Guide.....................................   200
        Prepared statement of....................................   218
    Omas, George A., chairman, U.S. Postal Rate Commission, 
      prepared statement of......................................    58
    Palladino, Vincent, president of the National Association of 
      Postal Supervisors, prepared statement of..................   246
    Potter, John E., Postmaster General of the United States, 
      prepared statement of......................................    44
    Roseboro, Brian C., Acting Under Secretary for Domestic 
      Finance, Department of the Treasury, prepared statement of.    24
    Smith, Fred, chairman and chief executive officer, FEDEX, 
      prepared statement of......................................   286
    Walker, David M., Comptroller General of the United States, 
      prepared statement of......................................    75
    Waxman, Hon. Henry A., a Representative in Congress from the 
      State of California, prepared statements of...............17, 266
    Young, William H., president of National Association of 
      Letter Carriers, prepared statement of.....................   153

 
     ANSWERING THE ADMINISTRATION'S CALL FOR POSTAL REFORM--PART I

                              ----------                              


                      WEDNESDAY, JANUARY 28, 2004

                  House of Representatives,
      Special Panel on Postal Reform and Oversight,
                            Committee on Government Reform,
                                                    Washington, DC.
    The special panel met, pursuant to notice, at 2 p.m., in 
room 2154, Rayburn House Office Building, Hon. John M. McHugh 
(chairman of the special panel) presiding.
    Present: Representatives McHugh, Burton, Schrock, Miller, 
Murphy, Blackburn, Davis of Illinois, Owens, Towns, Maloney and 
Clay.
    Also present: Representatives Shays, Waxman and Tierney.
    Staff present: Robert Taub, counsel; John Callender, senior 
counsel; Drew Crockett, deputy communications director; Teresa 
Austin, chief clerk; Brien Beattie, deputy clerk; Michael 
Layman, professional staff member; Phil Barnett, minority staff 
director/chief counsel; Kristin Amerling, minority deputy chief 
counsel; Karen Lightfoot, minority senior policy advisor and 
communications director; Anna Laitin, minority communications 
and policy assistant; Althea Gregory, minority counsel; David 
McMillen, Denise Wilson, and Andrew Su, minority professional 
staff members; Earley Green, minority chief clerk; and Cecelia 
Morton, minority office manager.
    Mr. McHugh. Now here's something I haven't done. The Postal 
hearing will come to order. It's been about, I don't know, a 
few months. I feel very Freddy Kruegerish. You've seen those 
Nightmare on Elm Street movies. They always bury him at the 
end, but we manage to rise for another version, and you are 
part of it. So thank you for being here.
    I also want to, before I begin, thank the full committee 
chairman and the ranking member, Mr. Tom Davis and Mr. Waxman, 
the gentleman from Virginia, for allowing those of us who have 
had no small interest in this question of postal reform to 
continue under the auspices of this specially-constructed 
panel.
    And, of course, we have Mr. Davis, Danny Davis, my good 
friend from the great State of Illinois, who has been such a 
partner in this process, still on board and still pushing the 
issue; and to my left, your right, which is where he ought to 
be and should be to people's right, former chairman of the full 
committee, who was an absolute stalwart in postal reform and 
put his personal interest and his personal integrity on the 
line and asked to serve on this panel. So, Dan, thank you so 
much for being here.
    I certainly want to welcome all of you back. I make light 
of the fact that in spite of the smart money to the contrary, 
we engaged in this issue again, but I think it underscores the 
fact that the mission we took up, while I think we did a lot of 
good work, remains unsolved. And as we look at our panel here 
today, really an excellent panel of witnesses to kick off what 
will be the first of three hearings that we are formally 
entitling ``Answering the Administration's Call for Postal 
Reform,'' I think we have yet another opportunity. And let me, 
with that, extend a formal welcome to our panel members: Brian 
Roseboro, who is Acting Under Secretary at the Department of 
Treasury, here to talk about the administration's call for 
reform. And he has been joined by the chairman of the Postal 
Service's Board of Governors, our dear friend David Fineman; 
the very distinguished Postmaster General of the United States, 
Jack Potter; and the Postal Rate Commission chairman, no 
stranger to this room, to this Congress, to this Hill, George 
Omas; and one of the stalwarts of not just postal reform, but 
so many issues that transpire here on Capitol Hill, the 
Comptroller General of the United States, David Walker. 
Gentlemen, thank you all so much for being here; we appreciate 
it.
    Before we hear from those witnesses, I would like to stress 
perhaps the obvious to those in this room, and that is the 
gravity of the matter that faces us today. The Postal Service, 
as I have said many, many times before, is a critical nature 
and critical thread in the fabric of this country. It's a 
nearly $900 billion industry. It employs in its total some 9 
million workers nationwide and represents more than 8 percent 
of the gross domestic product of our Nation. Our Postal Service 
is in trouble and requires reform legislation to prevent a 
meltdown, and indeed there is good reason, in my opinion, why 
this administration--George W. Bush's is the first 
administration since President Nixon's to call on Congress to 
modernize our Nation's postal laws. And I remain hopeful, as I 
did some 8 years ago when we began this process, that as in 
1970, Congress will once again in 2004 answer the President's 
charge.
    My longstanding belief that I think is reflected by the 
Presidential Commission on the Postal Service's findings is 
that the Postal Service itself, the administration and the GAO 
all hold the opinion that universal service as we know it is at 
risk and, simply put, that reform is needed to minimize the 
danger of a significant taxpayer bailout or, on the converse, 
may substitute a dramatic postal increase. The Congress 
provided a bit of financial breathing room for the Postal 
Service last year when we reduced its payment for pension 
obligations, but the fundamental problems remain unchanged, 
and, as the President's Commission found, the Postal Service's 
current business model is not sustainable going into the 21st 
century.
    Our witness testimony will make the case quite clear, I 
believe, but let's review some of the larger problems. First of 
all, under the heading of major financial liabilities and 
obligations, the Postal Service still faces about $90 billion 
in liabilities and obligations despite the passage of that 
pension legislation last year. Declining mail volume: In a 
historical first for the Postal Service, total mail volume 
declined last year for the third year in a row. Another 
unsettling milestone was achieved as first class mail volume 
declined by 3.2 percent in 2003 and is projected to decline 
annually for the foreseeable future, and this is a very serious 
problem because first class mail is the bread and butter of the 
Postal Service, paying for more than two-thirds of its 
institutional costs. Under revenues, the Postal Service 
revenues are budgeted for zero growth in 2004, which would be 
the first year since postal reorganization in 1970 that postal 
revenues have failed to increase. However, even the zero growth 
target will be challenging. In the absence of revenue generated 
by increasing volume, the Postal Service must rely even more on 
rate increases. Indeed, if it weren't for the postal pension 
legislation of last year, ratepayers would likely be facing yet 
another double-digit increase in rates at the present time. And 
these are just the highlights of the problems, which 
unfortunately go on and on: changes in the mail mix, increased 
competition from private delivery companies, declining capital 
investment, insufficient increases in postal productivity, 
uncertain funding for emergency preparedness, and major 
challenges to continue cost-cutting.
    While the problems are, without question, in my opinion, 
dire, the President's Commission and the President's subsequent 
articulation of principles for legislative change, I think, 
show us a path to some solutions. Fortunately, we have a very 
strong bipartisan basis upon which to proceed, including if I 
might define as a well-refined bill that we put together in 
last year's Congress, again on a bipartisan basis, largely 
under the leadership of Mr. Burton, the former chairman, and 
the ranking member, Mr. Waxman. The Postal Service is too 
important an institution to our economy to await the full brunt 
of the crisis that is clearly upon our doorstep, and as a 
resident of rural America, I know only too well the importance 
of the Postal Service's presence and operation in our daily 
life. And I look forward to working with my colleagues on that 
bipartisan basis within this committee, within this special 
panel, with the collaboration of our witnesses here today to 
respond to the President's call for action. We must preserve 
universal postal services at an affordable, uniform rate, and 
that is our challenge, and we can't fail.
    [The prepared statement of Hon. John M. McHugh follows:]

    [GRAPHIC] [TIFF OMITTED] T3087.001
    
    [GRAPHIC] [TIFF OMITTED] T3087.002
    
    [GRAPHIC] [TIFF OMITTED] T3087.003
    
    Mr. McHugh. And again, with a word of thanks to all of our 
witnesses, I would be happy to yield to the ranking member, Mr. 
Davis, who has joined us here, for any opening comments he 
might have.
    Mr. Davis of Illinois. Thank you very much, Mr. Chairman, 
and I'm pleased to join you in opening this hearing and in 
welcoming our witnesses and postal stakeholders.
    Before I begin my remarks, I'd like to commend Chairman Tom 
Davis, and Ranking Member Henry Waxman as well as yourself for 
the interest and willingness to work together in a bipartisan 
manner that all of you have shown. We began the 108th Congress 
on a very positive and productive note. We passed and 
subsequently enacted into law legislation correcting the 
calculation of postal payments to the Civil Service Retirement 
System. As consumers and members of the postal mailing 
community know, this change in postal pension law allowed the 
Postal Service to reduce its outstanding debt and hold postage 
rates steady until 2006. The Postal Service received a 
financial break and so did the public.
    As we begin the second session of the 108th Congress, we 
have additional work to do. First, because we created an escrow 
account in the postal pension law, the Postal Service must 
provide us a workable plan on its capital investments for 
productivity gains and cost-saving initiatives. We are 
expecting additional planning information in this area by the 
end of the month. This effort on behalf of the Postal Service 
to provide us with greater detail is critical if we are to 
address the escrow requirement as part of postal reform 
legislation. As for postal reform efforts, we are moving at a 
positive pace, picking up on a much more positive note than 
where we left off in the 107th Congress. Using your postal 
reform bill, H.R. 4970, as a starting point, we are working on 
establishing a strong foundation for reform. To date our staffs 
have met with several postal stakeholders to solicit their 
recommendations for positive changes. In addition to the 
recommendations submitted by the President's Commission on the 
Postal Service in July 2003, the administration's principles 
for postal reform are critical to the process. The Senate, too, 
is engaged. Senator Susan Collins, Chair of the Senate 
Governmental Affairs Committee, began holding hearings last 
year on recommendations of the Presidential Commission on the 
Postal Service. Additional hearings will be held next week. To 
put it succinctly, we are on a mission and working together to 
achieve a common goal; that is, changing the laws governing the 
Postal Service so that it is fully prepared and capable of 
thriving in the 21st century.
    Mr. Chairman, again, I would like to acknowledge the hard 
work of those in the postal mailing community, postal labor 
unions, nonprofits, mailers, postmasters, printers and 
consolidators, newspapers, banks, credit card companies, 
greeting card companies, magazines, catalog merchandisers, and 
a host of others. Their continued support and input is 
important as all of us work cooperatively to strengthen the 
Postal Service. I thank you very much and yield back the 
balance of my time.
    Mr. McHugh. I thank the gentleman not just for his comments 
and his presence here today, but for his hard work and for his 
devotion to this issue.
    Next, as I mentioned, someone to whom we all owe a debt of 
gratitude for his leadership, for his commitment on this issue, 
particularly during his time, 6 years, as chairman, the 
gentleman from Indiana, the Honorable Dan Burton. Dan.
    Mr. Burton. Thank you Mr. Chairman. First of all, I want to 
thank you for all the hard work you've put forth on this effort 
over the last 6 or 7 years. I don't think anybody's more 
knowledgeable about the problem than Chairman McHugh, and I 
really appreciate his hard work. When I was chairman, he was 
the point person on this issue, and we worked very hard for a 
long time to get a postal reform bill passed. We worked with 
the Postmaster and a number of you other folks to get the job 
done. Unfortunately, there were a number of different interests 
that had differing views and it ended up we tried to get the 
bill passed, and we couldn't. But now we're facing a much more 
difficult situation than we faced even then in that, according 
to the President's Commission on Postal Service, they are 
estimating the unfunded postal obligations at $90 billion. And 
when you say meltdown, Mr. Chairman, boy, you're not kidding.
    Something has to be done, and I don't know how we are going 
to get the various entities to see eye to eye on a final bill, 
but somehow it's got to be done because a meltdown is 
inevitable. And we add to that the fact that more and more 
businesses and industry are going to e-mails and faxes, thus 
taking away an awful lot of revenue from the Postal Service. It 
only complicates the problem further.
    So this is a very, very difficult problem. I don't envy you 
your position as chairman and trying to come up with 
legislation that will meet everybody's views, but it is 
something that I think has to be done. Otherwise we are going 
to have another huge government bailout, and it won't be a one-
time thing.
    And so this is a major problem, and I hope all of the 
people on the panel--I know they will--I know all the people on 
the panel and the people in the interested industries will work 
together to try to help us draft a bill that we can get passed 
through the Congress that will preserve the postal system, make 
it more workable, and thus not face a huge taxpayer bailout now 
and in the future.
    And with that, Mr. Chairman, thank you very much.
    Mr. McHugh. I thank the gentleman, and thank him again for 
his interest and participation.
    I don't want to presume the order of speaking and the 
normal rules as to my friends on this side. I was going to 
offer the opportunity to the ranking member of the committee to 
speak, but he's graciously deferred to his colleagues who were 
in attendance first. So I am happy to yield to a fellow New 
Yorker, the gentleman from New York, of course, Ed Towns.
    Mr. Towns. Thank you very much, Mr. Chairman. Let me thank 
Ranking Member Waxman, of course Chairman Davis, and also you, 
Mr. Chairman, for all the work you've done on this issue and 
also for holding this hearing on reforming the U.S. Postal 
Service.
    This is likely one of the most important series of hearings 
our committee will hold this year. Our decision will also 
affect the jobs of thousands of workers in the Postal Service 
and millions more connected to it, and that is something that 
we should never, never forget. While there may be significant 
disagreement over the recommendations made by the President's 
Commission, I think it is critical that we all agree and 
recognize that some change needs to be made.
    The Postal Service is on a course that is economically 
unsustainable. Each year the Postal Service adds 1.7 million 
new homes, businesses or other new delivery points; however, at 
the same time, volume has been declining for 3 straight years. 
While some of that decrease is due to the recent economic 
recession and the anthrax incidents, a portion of the decline 
in mail volume is due to structural changes that are only going 
to become more pronounced. I'm talking about e-mail, fax 
transmission, cell phones without distance charges have become 
substitutes for written correspondence. The Internet is also 
becoming an increasingly popular alternative for financial 
billing and payment. As residents and companies continue to 
take advantage of electronic options to communicate or make 
transactions, mail volume will drop. Overall, the Postal 
Service has lost $2.3 billion, that's ``B'' as in boy, in the 
last 3 years. We have bought some time by passing the Civil 
Service Retirement System Funding Act, which saved more than $6 
billion for the last 2 years, but we cannot allow this 
breathing room to deter us from making important but tough 
decisions. Usually, a crisis needs to be at hand to make such 
choices. I hope we do not wait that long on this one.
    Finally, Mr. Chairman, I would like to make one last point 
about the Commission's recommendations, which I think is 
critical. As we review the difficult choices ahead, I believe 
that the recommendation to preserve the Postal Service as an 
entity of the Federal Government that continues to provide 
universal service is of utmost importance and should be a lens 
through which we view possible solutions. The Commission said 
that privatization of the Postal Service was too risky and 
could disrupt universal service, so I think it is critical to 
remember as we consider possible changes to the institution 
that the Postal Service is not a private company, but an 
institution that holds a place of special public trust, and I 
think that's the thing that we need to keep in mind as we 
continue to deliberate. On that note I yield back.
    Mr. McHugh. I thank the gentleman for his comments and for 
his obvious interest in this issue.
    Just as a matter of procedure, and as I'm sure the 
gentleman from Connecticut is aware, my friend Mr. Shays, the 
policy is to allow the members of the panel to speak, and 
thereafter Members who are not a member are welcome. And we are 
thankful that they have an interest in this issue.
    So with that I would be happy to yield to one of the newer 
members of the full committee, not one of the newer members of 
the panel because she's been on it since its beginning, but 
someone who has sought out this position, this challenge, and 
we are very grateful for that, the gentlelady from Tennessee, 
Mrs. Blackburn.
    Mrs. Blackburn. Thank you, Mr. Chairman. I have no opening 
statement, but I do have a list of questions, so I will yield 
back my time and look forward to the questioning. Thank you, 
sir.
    Mr. McHugh. Best speech so far, Marsha. I like that very 
much. Thank you.
    Next I am happy to yield to the gentleman from Missouri I 
believe is next, Mr. Clay.
    Mr. Clay. Thank you. Thank you for yielding, Mr. Chairman. 
I would like to thank you and Ranking Member Waxman for the 
opportunity to participate in this important discussion on 
congressional postal reform activity. The U.S. Postal Service 
represents a mainstay of American culture and commerce. It is 
almost inconceivable to think that in the future universal 
service could be diminished or that small post offices would be 
closed.
    Reform means change, and the beginning of that change came 
last year with the passage of the Civil Service Retirement 
System Funding Reform Act of 2003. As a result, the Postal 
Service experienced some immediate financial relief, 
particularly in the area of pension savings funds. However, 
there are still many challenges ahead in order to bring the 
Postal Service up to a healthy financial position. Hopefully 
these hearings will bring us closer to understanding and 
accomplishing that goal.
    Finally, I would be remiss if I did not mention the fact 
that I have a deep concern for the women and men who perform 
the Postal Service function. I want to make it clear that their 
concerns are my concerns. That means opposing any changes that 
would deny postal employees the right to engage in free 
collective bargaining.
    Mr. Chairman, I look forward to hearing from today's 
witnesses and ask unanimous consent to submit my statement into 
the record. Thank you.
    Mr. McHugh. Without objection, so ordered.
    [The prepared statement of Hon. Wm. Lacy Clay follows:]

    [GRAPHIC] [TIFF OMITTED] T3087.004
    
    Mr. McHugh. I have to ask the gentleman, did your father 
help you write that?
    Mr. Clay. No. And he doesn't work for me.
    Mr. McHugh. I have no doubt you work for him. That's an 
awkward way of saying we are honored to have the President--the 
presence of former Chair of the Post Office and Civil Service 
Committee in the House, Bill Clay, who is also somewhat related 
to the gentleman who just spoke. Bill, good to see you. Thanks 
for being here.
    Next is the gentlelady from New York. Another New Yorker; I 
love it. Mrs. Maloney.
    Mrs. Maloney. Thank you, Chairman McHugh. And I really want 
to compliment you and Ranking Member Waxman and Danny Davis 
because you have really worked relentlessly on postal reform. 
And as one who represents upstate New York in many areas, there 
are more bears than people, but we have our post offices there, 
and we can get our mail up there, and so I know you have a 
vested interest in making sure that the services are there for 
the people.
    And we are here basically to review the report, the 
President's Commission report on the U.S. Postal Service. And 
it contained a number of principles that a number of people 
concerned about this support, obviously best practices, 
transparency, flexibility, collective bargaining, 
accountability, and self-financing.
    I do want to note the heroic work of postal workers in my 
district that I'm honored to represent during the terrible 
anthrax emergency. But we do need to do something because the 
Postal Service is facing billions of dollars in debt. They are 
in billions of dollars in debt and over the next few years, and 
the GAO--with them listing it on their high-risk list, postal 
reform is one of the most pressing issues we will address this 
year, and it will literally affect all of our constituents.
    I also, in addition to representing many postal workers, I 
represent much of the magazine industry. I represent Madison 
Avenue, and the magazine industry is enormously important both 
for the economy of New York and really, I would say, the 
economy of our country in general, and magazines and mailers 
are an essential part of our culture; they educate us, they 
entertain us, they are a part of our life. But I want to note 
that high costs have forced many magazines that I represent out 
of business in the last 2 years, including Mademoiselle, Mode, 
Brill's Content, and the Industry Standard, to name four, 
leaving these workers without jobs and really affecting our 
economy. So at a time when millions of Americans are out of 
work, we should protect the jobs of everyone who relies on the 
Postal Service for their employment.
    We need postal rates that are as low as possible, and I 
understand the importance of keeping rates affordable so that 
publishers, individuals and industries can continue to use the 
Postal Service. Any postal reform must take a balanced approach 
that considers the needs of everyone who depends on the Postal 
Service. All customers deserve the best service possible, and 
while the Postal Service continues to face stiff competition 
from e-mail, fax, the Internet, private delivery services, we 
need a mail system that reaches every household across the 
Nation, whether an apartment building in New York or a remote 
farmhouse in upstate New York or in some other rural area.
    Today we have the opportunity to review the Commission's 
recommendations and to look at the details included in the 
report. As they say, the devil is always in the details, and I 
look forward to the testimony. And I would like to know if 
there are any recommendations from those that are testifying 
today in support or in opposition to the assessments or the 
recommendations that have come forward and what steps the 
panelists feel are necessary to achieve true postal reform.
    Again, I thank Danny Davis, who heads the Postal Caucus on 
the Democratic side and, of course, Mr. Waxman, and my 
colleague from the great State of New York, our chairman. Thank 
you.
    Mr. McHugh. Thank the gentlelady.
    [The prepared statement of Hon. Carolyn B. Maloney 
follows:]

[GRAPHIC] [TIFF OMITTED] T3087.005

    Mr. McHugh. The last member on the panel is here to speak, 
the ranking member of the full committee and someone who, 
although he wasn't here, I want to again compliment for his 
understanding, his dedication to this reform initiative, the 
gentleman from California, Mr. Waxman.
    Mr. Waxman. Thank you very much, Mr. Chairman. I am pleased 
we are having this hearing today, and I am also pleased that we 
are starting off the issue of postal reform in a cooperative 
and bipartisan manner since we are addressing these issues with 
a starting point of looking at last year's Postal Civil Service 
Retirement System Funding Reform Act as a model for working 
together, and I look forward to continuing that cooperative 
approach.
    The Postal Service has long operated under a set of laws 
written in 1970, and they have not been adapted to the changing 
delivery environment, and the effects are showing. Over the 
past few years the Postal Service has been facing an increasing 
financial crisis and was approaching its debt ceiling. 
Fortunately we did pass that bill last year which provided some 
immediate financial relief to the Postal Service, but this law 
was not a comprehensive postal reform. Today as we begin this 
series of hearings on the need for postal reform legislation, 
we need to sort through what is a vital and complex subject, 
and I think we have the best opportunity that we've had in 
years to a resolve some of these issues and put the Postal 
Service on a sound footing for the future.
    I would like to highlight two important financial issues 
confronting the Postal Service. First, the pension law we 
passed last year changed the entity responsible for paying for 
the pensions or the cost of retirement benefits related to 
military service, shifting the responsibility from the 
Department of the Treasury to the Postal Service. The measure 
also required proposals from the Postal Service and the 
administration regarding the long-term treatment of such 
military costs. I agree with the Postal Service that these 
costs should be returned to the Treasury. Doing so would both 
relieve the Postal Service of an unnecessary burden and give 
the Postal Service a source of funds to deal with its unfunded 
health care liabilities.
    The second unresolved financial issue is the escrow account 
created for savings resulting from the postal pension law for 
fiscal years after 2005. The account cannot be used by the 
Postal Service until Congress has reviewed and approved the 
Service's plan for using the savings. While the recent proposal 
set forth by the Postal Service contained valuable ideas, we 
are not satisfied with the Postal Service's explanation of its 
plans and have asked for more details. I do not want to leave 
the escrow account in place, but I need to see that the Postal 
Service has thought through the best use of those savings. At 
the very least, the Postal Service needs to demonstrate that it 
has a workable plan to fund the key capital investments needed 
to ensure its long-term viability.
    I look forward to working with my colleagues. I 
particularly want to single out the chairman of this 
subcommittee Mr. McHugh, and our ranking Democrat, Mr. Davis, 
and the chairman of our full committee, Congressman Davis, as 
well. We need to think through and address the postal reform 
issues to give the Postal Service the tools it needs to serve 
the Nation into the 21st century. And I thank the witnesses 
that are here today, I look forward to their testimony.
    Mr. McHugh. I thank the gentleman again for his leadership 
and hard work and devotion to this issue.
    [The prepared statement of Hon. Henry A. Waxman follows:]

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    Mr. McHugh. Seeing no other members of the panel here, I'd 
be happy to yield to one of the senior members of the full 
committee, a subcommittee chairman, and someone who over the 
years has expressed a great deal of interest in this issue, 
even though he has not been legislatively directly involved, 
the gentleman from Connecticut, Mr. Shays, if he would care to 
make any comments.
    Mr. Shays. Thank you, Chairman McHugh. A very short 
statement to say I am here in part to just support your effort 
because I think you have been a rock in a very difficult 
circumstance, and to thank your ranking member, Mr. Davis, for 
being such a wonderful partner.
    The Postal Service is a public and very critical 
infrastructure of the United States. A reformed Postal Service 
needs to be immune from not just anthrax contamination but from 
fiscal suffocation in a very competitive marketplace. And I 
just know that you have the full support of the chairman of 
this committee in your efforts and I think that this is the 
year we get something done and it is very exciting to see your 
work finally pay off. Thank you, Mr. Chairman.
    Mr. McHugh. I thank the gentleman.
    I no sooner said no other panel members were here than the 
gentleman from Virginia joined us, and I'd be happy to hear 
from him.
    Mr. Schrock. Believe it or not, I have no opening statement 
but I've got lots of questions.
    Mr. McHugh. I appreciate the gentleman's being here.
    Having said all that, let me first of all say two things--
three things probably. A couple of unanimous consent request:. 
Gentlemen, we have your written statements, and without 
objection, we would ask that those be entered in their entirety 
in the record. Also, note that members on the committee who 
wish to enter written statements, whether those members are 
here or not--we have several, like Mrs. Miller, for example, 
who is on a very important CODEL to Libya and is still on her 
way back, who would like to make a statement--without 
objection, those too will be entered in their entirety in the 
record. And third, as some of the veterans at the front table 
know, it is the policy of the committee to swear in witnesses 
who appear, so if you gentlemen would please rise.
    [Witnesses sworn.]
    Mr. McHugh. The record will reflect that all of the 
witnesses responded in the affirmative.
    Gentlemen, again, our deepest thanks to you. And let's get 
right to the meat of this hearing. And as I mentioned, we are 
honored to have a very distinguished panel. And first I'm 
pleased to yield to the honorable Brian Roseboro, who's Acting 
Under Secretary of Domestic Finance for the Department of the 
Treasury. Mr. Secretary, thank you for being here. As you heard 
me say, your entire written statement is entered into the 
record. If you could summarize to the greatest extent that is 
possible, that would facilitate matters, but our attention is 
yours.

  STATEMENT OF BRIAN C. ROSEBORO, ACTING UNDER SECRETARY FOR 
          DOMESTIC FINANCE, DEPARTMENT OF THE TREASURY

    Mr. Roseboro. Thank you very much, Chairman McHugh. I'd 
like to thank you, Ranking Member Davis and the other 
distinguished members of the committee. We welcome this 
opportunity to testify on comprehensive postal reform today. We 
as well agree that, as many of you have already mentioned, the 
Postal Service plays a vital role in the commercial life of our 
Nation; however, the current business model, we feel, is not 
sustainable going into the 21st century. It is widely known 
that electronic diversion of mail volumes has caused a 
substantial, and likely irreplaceable, decline in first class 
mail. This trend is expected to continue. The Postal Service 
ended the latest fiscal year with large on- and off-balance-
sheet liabilities. These liabilities include $7.3 billion of 
debt owed to the Treasury, $7.1 billion for future workers' 
compensation costs, $8.7 billion for operating leases, and 
approximately $60 billion of unfunded postretirement health 
care liabilities.
    Recognizing this increasing financial vulnerability, 
President Bush took a decisive action. In December 2002, the 
President established a bipartisan nonstakeholders commission 
and tasked it with completing a comprehensive review of the key 
postal issues. The Commission was to articulate an integrated 
set of recommendations that would put the Postal Service on the 
path toward long-term financial viability and operational 
excellence. The Commission report is the most important 
document on postal reform in the last 30 years, in our opinion. 
The administration was pleased with the comprehensive array of 
recommendations that the Commission submitted as outlined in 
the President's Executive Order framing his commission. It 
considered the components of business, including revenue and 
cost. With its 35 recommendations the report takes us a great 
distance toward reaching a common goal; that is, to implement 
changes that best prepare the Postal Service to be a sound and 
efficient provider of services, a quality employer and a fair 
competitor long into the 21st century.
    While the administration may not agree with every aspect of 
each of the 35 recommendations, we encourage congressional 
leaders to carefully consider how the full range of 
recommendations for legislative consideration might be 
incorporated in meaningful, comprehensive postal reform. 
According to the Commission, 16 of the 35 recommendations do 
not require any legislative action. The Commission concluded 
that the Postal Service could implement each of these without 
any undue delay connected with legislative changes.
    I also note that the Postal Service transformation plan of 
April 2002 and the Commission's recommendations are not 
incongruous. In fact, they are remarkably similar. While I 
understand that the Postal Service management is prudent to 
take time to carefully analyze proposed changes and implement 
reform actions in a sound manner, I take this opportunity to 
underscore the administration's strong support for the Postal 
Service's efforts to implement reforms as expeditiously as 
possible. As Postmaster General Potter has frequently stated, 
the transformation plan is a blueprint for positive change and 
should remain a guideline for future change. We agree, and 
would add the Commission's recommendations to this list of 
action items.
    In outlining the circumstances that led to where we are 
today, we must add the Civil Service Retirement System [CSRS], 
Postal Refunding Reform Act signed into law by the President in 
April 2003. As you well know, this act contributed 
significantly to the financial recovery of the Postal Service 
and is a tribute to the hard work and dedication of the members 
of this panel in particular. Thanks to this legislation, which 
allowed a transformation of the Postal Service's CSRS regime 
into a calculation mechanism that matches the Federal Employees 
Retirement System [FERS], the Postal Service immediately 
yielded an estimated $78 billion financial gain. We believe 
that this has established the appropriate funding provisions 
for CSRS.
    Despite this enormous one-time gain, the Postal Service is 
not yet out of the woods. Even with the strong leadership of 
the Postmaster General and the Postal Service Board of 
Governors' drive and ever more competitive organization, more 
needs to be done. The principles that the administration would 
articulate for Postal Service reform are as follows: Principle 
1: To implement best practices. The administration supports 
comprehensive reform that ensures that the Postal Service's 
governing body is equipped to meet the responsibilities and 
objectives of a business of this size and scope. We recognize 
the hard work the President and past Boards of Governors as 
well as postal management and its work force.
    Principle 2: Enhanced transparency. In keeping with our 
desire to implement best practices, we seek postal reform 
legislation that takes steps to ensure that important factual 
information on the Postal Service's operations and performance 
is accurately measured and made available to the public.
    Principle 3: Provide for greater operating flexibility. In 
return for increased transparency and accountability, and given 
its self-financing obligation, the administration believes that 
the Postal Service's governing body and management should have 
a greater authority to reduce costs, set rates and adjust key 
aspects of its business in order to meet its obligations to 
customers in a dynamic marketplace.
    Principle 4: Foster greater accountability. Given its 
existing monopoly, potentially greater flexibility for 
operations in this competitive position and some important 
segments of the delivery marketplace, we urge Congress to enact 
legislation that ensures that there is appropriate independent 
oversight to protect consumer welfare and universal mail 
service. We would like to see legislation that provides the 
corporate governing body with necessary tools to properly 
motivate postal management to achieve key objectives, such as 
increasing productivity, enhancing service and improving labor 
relations.
    Principle 5: Ensuring self-financing. The administration is 
committed to its desire to see a Postal Service that is 
financially self-sufficient, covering all of its obligations. 
We believe that ratepayers should be responsible for covering 
liabilities, including the off-balance sheet, unfunded 
liabilities. By doing so the Postal Service remains motivated 
to operate in a manner that strengthens the financial and 
operational health of the Postal Service.
    The administration sees postal reform as an integrated 
whole. It is crucial to address all aspects of the Postal 
Service's cost and revenue lines, its balance sheet, off-
balance sheet components, its corporate governance, its 
competitors, as well as the taxpayers and ratepayers. Reform 
should be characterized by the five principles which, when 
implemented, will ask each stakeholder to accept shared 
sacrifice in order to achieve a better, stronger and more 
accountable, transparent Postal Service.
    Issues surrounding postal reform are indeed complex. We are 
in the presence today of congressional leaders such as 
yourself, Chairman McHugh, and others who have spent a 
tremendous amount of time and dedication in making the Postal 
Service better. Postmaster General Potter's sustained 
dedication to achieve this objective must also be recognized. 
The issues that are involved with postal reform are complex; 
however, the administration stands ready to work with you to 
take this critical issue forward.
    I thank you, and I'll be pleased to answer questions at the 
appropriate time.
    Mr. McHugh. Mr. Secretary, thank you for your comments, for 
your being here today.
    [The prepared statement of Mr. Roseboro follows:]

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    Mr. McHugh. And I mentioned what I thought was a very 
proactive position by the administration, by the President, 
given the first time it's been focused upon since the Nixon 
administration. But I would be remiss if I didn't pay a tip of 
the hat to the Treasury Department that really, in terms of the 
administration, kind of led the charge and brought the issue to 
that end of Pennsylvania Avenue's attention, and we appreciate 
deeply the leadership role that the Department played. Thank 
you again for being here.
    With that, our next witness, as I mentioned in my opening 
remarks, is a good friend of this subcommittee, a good friend 
of the Postal Service, and a man who, not for power or glory or 
money, I don't believe, dedicated himself and continues to 
dedicate himself to the best possible Postal Service that the 
United States can produce, the chairman of the Postal Board of 
Governors, David Fineman.

STATEMENT OF DAVID FINEMAN, CHAIRMAN, U.S. POSTAL SERVICE BOARD 
OF GOVERNORS, ACCOMPANIED BY JOHN E. POTTER, POSTMASTER GENERAL 
                      OF THE UNITED STATES

    Mr. Fineman. Thank you, Mr. Chairman.
    Mr. McHugh. Thank you.
    Mr. Fineman. I'm now in the last year of my term on the 
Board of Governors and you and I, Mr. Chairman, I think, began 
to attack this issue together almost about 8 years ago. And I 
want to thank you particularly, Congressman Davis, and other 
members of the committee who have been there with us for so 
long in trying to enact reform. I do want to take this 
opportunity to also thank the administration for putting in a 
lot of labor on this issue.
    Mr. Chairman, I remember some time ago you and I spoke to 
an industry group, and I think at that time, which was probably 
someplace around 7, 8 years ago, I talked about a train wreck 
that was about ready to happen. I'm somebody from Philadelphia, 
and I commute here by taking that Northeast train. It begins in 
Boston. And if we assume that train wreck is going to occur in 
Washington, I'd suggest to the members of the committee that 
the train's about ready to leave Baltimore now and about ready 
to come into Washington.
    There is a necessity to change the law, and I've been here 
and said that on numerous occasions. And the real evidence of 
that has been alluded to before, but a couple of facts have 
made it even more apparent. If you look at first class volume 
as an example, we peaked at about 104 billion pieces in 2001. 
We declined by 1 billion pieces in 2002 and declined by 3 
billion pieces in 2003. The President's Commission and others 
really don't know where that's going to lead, and I'm not sure 
anybody does, quite frankly. And for the first time since 
postal reorganization, first class mail volume is less than 50 
percent of the total of mail. All of us, every day--I'm an 
attorney in Philadelphia--how many pieces of e-mail do I get 
per day? How many documents do I get that are sent to me by 
lawyers from throughout the country that previously would have 
been sent to me in the mail? How many times do I print out 
letters that are sent to me by e-mail so that I can put them 
into my files? We know what the problem is.
    I commend all of you for taking the leadership. The Board 
understood as well, and particularly in the last 4 years or so, 
I think that the Board has exerted leadership and begun to work 
with management as a board should work with management, and 
that is to say to management, ``Look, these are the things that 
we want to get done.'' And management, the Postmaster General, 
has executed that plan. I think it began by us saying some time 
ago--I was looking at testimony before this committee some time 
ago when we froze facility spending, capital spending. It 
wasn't that popular with some of the Members of Congress, but 
it needed to be done. And what we did by doing that was to 
begin to change the way we spend money at the Postal Service 
and begin to have more money to spend and to be able to keep 
rates at a level that made a little bit of sense. We began to 
examine our core values. So we did look at the e-commerce area, 
where a lot of money had been spent, and my testimony reflects 
it wasn't a good venture. And the Board put pressure on 
management, and you'll notice that we are not involved in those 
kinds of issues anymore. We selected a Postmaster General, who 
I'll speak about a little bit later. We reduced the average 
interest rate that we now pay on our debt from 5.1 percent to 
1.1 percent. More importantly, we said to the Postmaster 
General, ``It looks to us like we have to decrease our career 
complement, that is the number of employees we have. And that's 
declined by 24,000 in 2003 and will probably decline by 11,000 
more positions next year. And we did that, I would suggest, by 
working closely with our labor unions, without having any 
layoffs; and it was done with attrition and cooperation with 
our labor unions. And what we need now is to attack, as 
Congressman Waxman has indicated, our facility and 
infrastructure. You know, in Philadelphia, for years the Postal 
Service building was across from the train station, and that is 
where it's located in so many major cities, and that's because 
mail traveled on trains. Mail doesn't travel on trains any 
longer. It travels on an interstate highway system. We've got 
to be able to rationalize what this infrastructure and network 
system is. And I commend the leadership also of David Walker. I 
think that by issuing his report--and he has said to us that we 
need to look closely at many issues, and I commend you for 
doing that, and it gave us the discipline to do that. But now 
we need help. We need help to change the laws.
    As you know, Mr. Chairman, the entire Board, at least since 
March 2001, has sent a letter to Congress and to the President, 
and we've testified before the President, the Commission, and 
we have said that we need change. And we agree to a large 
degree with most of what the President's Commission has said. 
The President's Commission raised the issue of transparency, 
and the Board reacted to it. I think that you'll see within the 
next months reports that are far in excess of, I think, what 
might be--the SEC requirements are going to be. We are going to 
report on a monthly basis. We are going to take action to be as 
transparent as we can, but we need additional flexibility.
    The rate process is broken. There's no necessity for me to 
testify at length about that. I've done it before. We can 
support a system that includes well-constructed price caps 
which--when we need special relief, we are going to need 
special relief in exigent circumstances. And as many of my 
friends know, many of us, I've been a strong advocate of 
collective bargaining. I do not believe that the Commission 
should, or a postal rate commission, or a postal regulatory 
board should interfere in any way with the collective 
bargaining process. On the other hand, I do believe that 
everything should be on the table for collective bargaining, 
including health benefits.
    There are, as Congressman Waxman has indicated, and as 
others, two important legislative issues before Congress in the 
near term, funding of the military service cost and eliminating 
the escrow provisions. And all that I ask is--as chairman of 
the Board, is that we attack those issues quickly. And the 
reason that I say that is if we have the present law that we 
operate under, which is a ridiculous ratemaking process, we 
have to set--we have to propose rates to the Postal Rate 
Commission some 10 months before rates would be enacted. We 
have to begin to work on that system, I've said, 18 months to 
24 months ahead of time. We need action on this, so that we, 
the Board, can talk about rates and can consider rates in a 
considered manner.
    Where we disagree with the President's Commission, or where 
I disagree, are basically three areas, one I've mentioned 
already being collective bargaining. The other is the Postal 
Regulatory Board, and I think that the Postal Regulatory Board, 
there has to be a clear line between what your functions are, 
the managerial, the public policy decisions about universal 
service, about the monopoly, and those that the Postal 
Regulatory Board would make. And second of all, and I guess 
there's nobody who should shun their responsibility, but rather 
to comment upon what the President's Commission has recommended 
in regard to its Board of Directors, I personally don't care if 
you change the name from Board of Governors to Board of 
Directors, but I think that one of the most important things 
that we can do is to keep the bipartisan nature of this Board. 
We have not had Democrat and Republican fights on this Board. 
It has five of one party and four of another. The President's 
Commission, I think well intended, could result in a very 
highly partisan Board, which I would not like to see happen. 
There are, in that report, certain age restrictions which I 
think are appropriate. However, I think that the bar of 70 
years of age, we might raise it a little bit. You know, Jack 
McKeon did win the World Series. He was about 72, so I am not 
sure that's appropriate.
    In conclusion, Mr. Chairman, I am saying that we can do--
we're doing everything we can, but the business model from 1970 
is no longer valid, and we're reaching the limits of what 
current opportunities are available to us, and we've got to 
change those assumptions. I think that you and I, Congressman 
Davis, Congressman Waxman, I see here, you know we've said the 
time is now on numerous occasions, but I'm telling you that 
train is about ready to run into Union Station, and it's about 
time that we really made some changes. Before I conclude, I do 
congratulate all of you on working in a bipartisan way to 
change this law, and I look forward--I want to say that I'm 
about ready to finish my term, and I do look forward to working 
with all of you on changing that law,
and I continue--even if I should be gone within some period of 
time as chairman of the Board, I would look forward to 
continuing our relationship to change this law. I think I have 
a lot invested in it at this point.
    [The prepared statement of Mr. Fineman follows:]

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    Mr. Fineman. With that, Mr. Chairman, I'd like to introduce 
the Postmaster General, if I could.
    Mr. McHugh. Please do.
    Mr. Fineman. That is one of the key decisions that the 
Board has to make, from time to time, is to choose the 
Postmaster General. We chose Jack Potter as a career employee 
of the Postal Service because we understood that we needed 
someone who was willing to make tough decisions, and willing to 
make hard decisions, understanding the desperate place that the 
Postal Service was in. Jack has made those decisions and at the 
same time has created an atmosphere that I have never seen 
before between our labor unions and ourselves. He's done that 
in a manner that is really admirable and, I think, clearly one 
of the best decisions that we made was to have Jack Potter as 
our Postmaster General. So with pleasure, Mr. Chairman, I would 
like to introduce the Postmaster General.
    Mr. Potter. Thank you, David. And I, too, want to add my 
thanks to every member of the special panel for the opportunity 
to add to the discussion of the need for comprehensive postal 
legislative reform. I want to thank you, Chairman McHugh, for 
your personal commitment over these many years. It's been a 
long struggle. I'm also grateful to Congressman Davis, 
Congressman Waxman and Congressman Davis who's not here, 
Congressman Burton for all of the efforts that have been made 
to move postal reform. And there are many people on the 
Committee on Government Reform and they too have taken part in 
leading the way to protect and preserve universal mail service 
for all Americans well into the future. My compliments to the 
administration--and Brian's here representing them--the 
Congress, to my friend Comptroller General David Walker for 
recent legislation that adjusted the Postal Service's payments 
to the Civil Service Retirement System. The legislation has 
provided a period of rate stability for the American people and 
American businesses until at least 2006. Given the challenging 
economic conditions in recent years, stable rates could not 
have come at a better time. In addition, the legislation allows 
us to significantly lower our debt.
    However, there are two open issues remaining that we need 
to discuss regarding the 2003 CSRS legislation that require 
your action, and Congressman Waxman mentioned them. The first 
open issue concerns shifting to the Postal Service from the 
Treasury the retirement liability costs of our employees' 
military service before they became postal employees. This 
obligation transferred payment of more than $27 billion from 
taxpayers to ratepayers.
    Last year the President's Commission examined the impact of 
the move. In its final report, the Commission recognized the 
complexity of the issue, understood the long-term financial 
ramifications, and recommended that Congress reverse the 
position. We agree with the Commission and with Congressman 
Waxman. Not only does $17 billion of the $27 billion represent 
a repayment of funds already provided to retirees by the 
Treasury, but more than 90 percent of the $27 billion 
obligation results from military service performed before the 
Postal Service was established in 1971. We believe that these 
military service obligations should be returned to the Treasury 
and not be the responsibility of postal ratepayers. Further, we 
propose that the funds required to finance the $27 billion 
military service cost instead be allocated to fund our long-
term obligation and retiree health care benefits estimated to 
be between $47 and $57 billion. Funding retiree health care has 
been a major issue for the GAO and the Congress, and we believe 
has greater priority than funding military service costs that 
have no linkage to operating the Postal Service. Finally, our 
proposal is that these funds stay in the CSRS fund, and 
therefore will not negatively impact the Federal deficit in a 
significant way. I look forward to continued discussion on this 
proposal with this committee.
    The second issue deals with an escrow account, as 
previously mentioned. As constructed in the legislation, the 
Postal Service will be required to put the CSRS, ``savings,'' 
in fiscal years 2006 and beyond into escrow pending 
congressional review. In effect, in 2006 the requirement could 
negate the very benefit the CSRS legislation made possible by 
putting postal customers back where they started before the 
legislation was enacted.
    I agree with Congressman Waxman that we need to deal with 
this escrow fund and put it to bed. Moreover, the rate increase 
required to fund the escrow could have a damaging effect if we 
were made to create it on the mailing industry and businesses 
that rely on the mail to reach their customers. I recognize the 
intent of the provision in last year's legislation, and let me 
assure you that postal management and the Postal Board of 
Governors will not in any way squander the benefits gained from 
reduced CSRS benefit payments. As requested, we are now 
developing added detail relating to our networks and employee 
complement requirements in the future. I look forward to 
continued dialog on this issue. We really want to make sure 
that this committee is satisfied with our response. Resolution 
of these issues in this session of Congress will help us in 
every mailer segment in this country as we examine our revenue 
needs for 2006 and beyond.
    The Postal Service has made great strides in the past few 
years. As chairman of the Board Fineman mentioned, there is a 
mood of optimism among our employee and management ranks that 
we can do things we never thought possible. This can-do 
attitude transcends every aspect of our business and compels us 
to reexamine long-held presumptions. In 2003, we experienced 
our fourth straight year of increased productivity. We achieved 
record levels of service in all measured categories. We saw 
customer satisfaction reach record levels. We saw workplace 
environment indicators reach record levels, too. There is a new 
positive and constructive relationship between labor and 
management as evidenced by significant reduction in employee 
grievances and voluntary contract extensions that we reached 
with several major unions. We have been aggressively, and with 
common sense, managing the business, and we will continue to do 
so.
    Yet for all the success that we have had, no one should be 
lulled into a false sense that all is right with the postal 
world. As Chairman Fineman pointed out, the underlying business 
model remains problematic and compels legislative change if we 
are to continue to provide the American people and American 
business with a similar level of affordable service that we 
have today. No, the Postal Service is not broken today, nor 
will it be broken in the next year or the year after; however, 
mail volume trends are a cause for concern. Without new growth 
opportunities and aggressive cost reductions, we could be 
forced to raise rates such that volumes will decline 
precipitously.
    Management and the Board must have sufficient tools to 
increase revenue and lower costs to meet the changing customer 
needs for mail services. We should not wait for a crisis event. 
That is why I applaud the foresight of the President and this 
committee to craft a new blueprint. We can and should buildupon 
the President's Commission recommendations and the five 
principles outlined by the President. As detailed in my written 
testimony, I believe a sixth principle is the commitment to a 
strong collective bargaining process.
    I look forward to working with each of you on legislation 
that addresses the need for pricing flexibility, including 
annual adjustments; that includes appropriate regulation and 
transparency; that provides management and the Board with the 
necessary authority to adjust postal network infrastructure of 
plants and post offices with appropriate community input; that 
defines public policy responsibilities among management, the 
Board, the regulator, and the Congress regarding issues such as 
universal service; and one that takes a fresh look at the 
collective bargaining process to strengthen the relationship 
between management and labor, balancing the legitimate concerns 
of the customer. With Chairman Fineman and the Governors of the 
Postal Service, I look forward to developing, at this unique 
time in our history, legislative reform that works for the 
American people, works for our employees, and will deliver for 
America. Thank you very much, Mr. Chairman.
    Mr. McHugh. Thank you.
    [The prepared statement of Mr. Potter follows:]

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    Mr. McHugh. And I certainly want to associate myself with 
the words of the chairman of the Postal Board of Governors with 
respect to the great work you have done, Jack. We appreciate 
that effort and look forward to our continuing partnership in 
that regard.
    I would note we were just notified that sometime, 3:15, 
3:30, we are going to have votes. I would therefore suggest, 
and that is all we can do in this great democracy, suggest our 
last two witnesses do the best they can, and I would like to at 
least get through the oral presentations prior to the vote. I 
think that would facilitate all of our schedules. So to the 
extent that is possible, we appreciate your cooperation.
    With that, Mr. George Omas, whom I said is no stranger to 
this Hill, and certainly spent long and very dedicated service 
in the Post Office Civil Service Committee in his previous 
life, and now serves, of course, as chairman of the Postal Rate 
Commission. George, welcome. We look forward to your comments.

    STATEMENT OF GEORGE A. OMAS, CHAIRMAN, U.S. POSTAL RATE 
                           COMMISSION

    Mr. Omas. Thank you, Mr. Chairman.
    Mr. Chairman, members of the committee, thank you for 
inviting me to present testimony to the Special Panel on Postal 
Reform and Oversight of the Committee of Government Reform. I 
am pleased to have the opportunity to discuss the need and 
prospects for comprehensive postal reform, focusing on the five 
principles recently suggested as guides by the administration.
    Starting with your efforts almost 8 years ago, Mr. 
Chairman, there has been a gradual awakening to the necessity 
and potential benefits of modernizing the Postal Service. The 
administration should be commended for bringing this issue of 
postal reform to the forefront of public debate by establishing 
a blue ribbon commission to review the problems and then 
releasing its five principles for postal reform. We at the 
Postal Rate Commission agree that modernization is essential, 
that legislation is necessary to accomplish it, and that these 
five principles provide a sound foundation for going forward.
    The administration calls for the Postal Service to 
implement corporate best practices to meet its responsibilities 
and objectives. The President's Commission suggested that the 
Postal Service's Board of Directors and senior management need 
greater flexibility to manage without some limitations imposed 
by current statutory constraints. To counterbalance greater 
management independence, the Commission also recommended that a 
postal regulatory board be vested with broad authority to set 
the public policy parameters within which the Postal Service is 
allowed to operate. I support, as does the Commission, 
enhancing both Postal Service flexibility and accountability. 
This balanced approach is directly in line with the principles 
proposed by the administration.
    One area where additional flexibility is possible is rate-
setting. The new ratemaking system envisioned by the 
President's Commission has several potential virtues, including 
reduction in administrative burden and uncertainty about 
pending rate changes. However, it would also limit the 
opportunity for parties who might be affected by rate changes 
to participate in the process, and severely curtail the amount 
of time available for evaluating the justification for above-
inflation rate increases. Congress should carefully consider 
the views of mailers and other stakeholders on this issue.
    The President's Commission recommended a new regime of 
public accountability by the Postal Service, including the 
establishment of a postal regulatory board vested with 
substantial expanded authority. The President's Commission also 
recommended that the Postal Regulatory Board have authority to 
hear and resolve a variety of complaints, thereby supplying a 
substantial amount of public protection not available under 
current law. I believe that providing regulators with authority 
to order appropriate remedial action when a complaint is found 
justified should limit the current concern that the Postal 
Service is not sufficiently accountable. The President's 
Commission also recommended that the new regulator be assigned 
oversight on the scope of both postal monopoly and its 
universal service obligation. The Commission provides a sound 
public policy rationale for assigning these functions, but 
criteria for defining the appropriate scope of Postal Service 
operations should be clarified. The PRC suggests that any 
legislation implementing postal reform should explicitly direct 
the regulatory body to consider preserving an adequate level of 
universal service as the principal criterion when reviewing the 
scope of the postal monopoly.
    Last, Mr. Chairman, I cannot overemphasize the importance 
of ensuring that the reformed Postal Service become financially 
transparent, as the President's Commission recommended. In the 
Postal Rate Commission's view, establishing a financially 
transparent Postal Service is essential to assuring that it 
will function as a successful, performance-driven public 
service in the future. Furthermore, financial transparency--in 
the form of immediately accessible basic data about Postal 
Service finances and operation--will be an indispensable tool 
for implementing effective regulatory oversight of a 
transformed Postal Service.
    Mr. Chairman, I believe we all recognize that fostering a 
financially self-sufficient Postal Service that will be able to 
cover all of its anticipated financial obligations is the 
primary challenge of postal reform. However, in moving to 
improve the Postal Service's ``bottom line,'' care should be 
taken to assure the preservation of the Postal Service's 
honored tradition of binding the Nation together by making 
affordable services readily available to all. Americans trust 
their Postal Service to meet their needs regardless of 
geographic location or economic circumstances. This trust has 
been earned through decades of dedicated service and it must 
not be squandered.
    Mr. Chairman, thank you for the opportunity to present my 
views, and I look forward to working with you and the 
committee. And should any of you need anything from the Rate 
Commission, we would be most happy to oblige.
    Mr. McHugh. Thank you very much, Chairman Omas.
    [The prepared statement of Mr. Omas follows:]

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    Mr. McHugh. And I would be remiss if I didn't know you were 
joined by two of your current colleagues, Tony Hammond and Dana 
Covington, seated behind you, also members of the Rate 
Commission. As you were giving this--and by the way, he did 
summarize; this was a 14-page written statement, I know, I have 
seen it, and I appreciate that. But as you were going through 
those, I couldn't help but wonder if Ed Gleiman would agree 
with you, and I am watching to see if the former chairman of 
the PRC nodded or did anything. He is stone cold. He gave no 
indication at all. So I will have to talk to him directly about 
it. But I appreciate your comments.
    Last, and certainly not least, a gentleman who, as I said, 
is no stranger to this Hill let alone this committee, 
particularly the former subcommittee and now panel, and his 
organization has been absolutely outstanding in providing the 
Congress with dispassionate, sometimes very cold and hard 
facts, but cold and hard facts we absolutely need. And our 
efforts with respect to postal reform would have been far less 
revealing and helpful had it not been for the input of his good 
people and under his leadership. And we are looking forward 
today to the comments and the appearance once again of the 
Comptroller General of the United States, the Honorable David 
Walker. David, welcome.

STATEMENT OF DAVID M. WALKER, COMPTROLLER GENERAL OF THE UNITED 
                             STATES

    Mr. Walker. Thank you, Mr. Chairman and members of the 
special committee. It is a pleasure to be before you to talk 
about postal reform and transformation.
    GAO believes that comprehensive postal reform is necessary. 
As you know, Mr. Chairman, we put postal transformation on our 
high-risk list in 2001, and the reason we did that was because 
we believed that the current postal business model is not 
sustainable in the 21st century. We were pleased that the 
President appointed a special commission, which we had 
recommended, and that the Commission agreed with our bottom-
line conclusion.
    I would also like to note for the record that we believe 
that much progress has been made, and there have been many 
positive developments under Chairman Fineman's and Postmaster 
General Potter's leadership during the last 2 years. Those are 
encouraging developments. At the same point in time, many, many 
challenges remain. And, clearly, one of the things that has to 
be done is that Congress is going to have to help in order to 
ultimately achieve the necessary transformation that is 
required.
    We agree with the administration's five key principles and, 
I might add, with the sixth principle that the Postmaster 
General just added here that is outlined in their statement. 
The Commission's report provided many valuable insights and 
recommendations. We agree with most of them, but not all of 
them.
    One key challenge for the Congress in developing postal 
reform legislation is to draw clear distinctions among those 
areas involving public policy issues where statutory guidance 
would be appropriate versus those areas that should be the 
purview of a regulatory body and those that should be within 
the authority of postal management and its governing body. One 
clear example of this has to do with the public policy issue 
that Congress needs to address dealing with defining the 
appropriate mission and role for the Postal Service in the 21st 
century, including how universal, affordable Postal Service 
should be defined given 21st century realities.
    Where the distinction between regulatory, management and 
the Board's responsibilities should be drawn is a more 
difficult and controversial issue, but a necessary undertaking. 
Although we have not taken a position on the proposed price cap 
system or any particular rate-setting model, I do have some 
thoughts on one possible approach to this if you would like to 
address it in a Q and A session.
    In the governance area, we share the concerns raised by the 
Postal Service regarding the Presidential Commission's 
recommendations on the appointment process for Board members. 
Namely, that the proposed process could result in the 
politicization of the Board.
    Transparency is key to ensuring appropriate accountability 
in any area, including the Postal Service. In this regard, the 
regulatory body can play an important role in ensuring adequate 
financial and performance reporting, cost allocation, and data 
collection. Postal management does need additional flexibility 
to meet its transformation objectives by implementing best 
practices to achieve cost savings and efficiency gains, many 
examples of which were suggested by the Presidential 
Commission.
    One area where the Service has indicated a need for 
additional flexibility, and we agree, is rationalizing its 
infrastructure and work force. At the same point in time, they 
have disagreed with the idea of creating a special commission, 
such as a BRAC-type commission, for rationalizing its 
infrastructure. That was recommended by the President's 
Commission as well as by GAO as one possible alternative. If 
the Postal Service wants to do this on its own, we believe it 
is imperative that there be a comprehensive and transparent 
plan for rationalizing the infrastructure and the workforce, as 
well as policies and procedures. While much can be done and has 
been accomplished during the last few years without such a 
comprehensive and transparent plan, we believe the heavy 
lifting will not be able to be done without such a 
comprehensive or transparent plan.
    In the human capital area, we believe that Congress has a 
rare opportunity to address several key issues, including who 
should have the responsibility for military service pension 
costs, funding issues relating to the Service's pension and 
retiree health obligations, as well as the escrow fund that was 
established last year as part of pension legislation. The 
Service has made some very good points regarding the need to 
make changes in its workers' compensation benefits as well. 
Another difficult issue that needs to be addressed is the issue 
of pay comparability, where we suggest that some additional 
statutory guidance in this area might be in order. Regarding 
the Service's retiree health benefits, we are pleased that the 
Service has proposed prefunding some of its retiree health 
benefits obligation. In our view, this approach represents a 
better balancing of interests between current and future 
ratepayers, given the demographic profile of the Service. We do 
have some concerns about how it would be implemented, but 
conceptually we think it has merit.
    Finally, we applaud Chairman Fineman's emphasis on improved 
financial transparency, but we also agree with the Treasury 
Department that serious consideration should be given to the 
proper accounting and reporting of retiree health obligations 
in the Postal Service's financial statements. In summary, 
comprehensive pension reform is necessary. Such reform should 
be designed to attain a modern, effective, and sustainable 
business model for the Postal Service. It needs to provide 
reasonable flexibility to management, appropriate transparency 
to the public, and adequate accountability for all parties 
involved.
    And the last thing, Mr. Chairman, I think it is important 
to note that while nobody likes rate increases, we should not 
measure success in the Postal Service by how long we are able 
to delay rate increases. Some rate increases are inevitable. In 
fact, delaying rate increases in certain circumstances may be 
imprudent in light of the demographic profile of the Postal 
Service. If the result of a delay is to preposition more 
significant and dramatic rate increases in the future in the 
face of increasing competition, that is not necessarily 
success. And so I think that we have to recognize that there is 
a balancing of interests that has to occur and that ultimately 
achieving a universal, affordable Postal Service that is 
sustainable is of critical importance.
    Thank you, Mr. Chairman.
    Mr. McHugh. Thank you, General Walker.
    [The prepared statement of Mr. Walker follows:]

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    Mr. McHugh. Gentlemen, I am not going to take a lot of time 
asking questions, at least at the outset. I want to defer to my 
colleagues who were gracious enough to be here. I would just 
say that Chairman Fineman mentioned the train a long time 
coming. I am always reminded now, after 8 years of being at 
this, the story of the man who lived his entire life as a 
hypochondriac, and went to the doctor every week convinced that 
he had a life-threatening illness, and of course every week he 
was found not to. And then he finally died at the age of 109 
and had on his tombstone: ``See, I told you I was sick.''
    We have been saying that there is a crisis looming for 
about 8 years now, as you noted, David, but I think it is real. 
And in spite of the lack of material evidence of that, it has 
far more to do with the amazing job that Jack Potter and the 
800-some thousand employees of the Postal Service have done in 
kind of patching up the holes that many of us on this side of 
the hearing room at least have chosen to ignore. And I don't 
think we can get away with it for too much longer.
    I would just ask you good folks one question. There is a 
menu of things out here in the Treasury Department, and the 
President's Commission listed them as principles, but within 
each of those principles are some points. I don't know if it is 
within the political ability of the Congress to do everything 
we need to do in one fell swoop, but we are certainly going to 
try to do as much as we can, but there are certain political 
dynamics that can't be ignored. If you gentlemen could pick two 
or three items that you think are sine qua nons, absolute 
musts, without this, nothing, as opposed to reform, what would 
those two or three items be? And I am going to start with the 
Postmaster General, if he could tick them off, because he has 
the closest hand on the pulse, I think.
    Mr. Potter. Mr. Chairman, there are two things or three 
things that I think need to be done. First, the Civil Service 
retirement legislation needs to be brought to completion, and 
we were anxious to work with the committee to do that. In 
addition to that, I believe that we need to give management and 
the Board the tools when it comes to pricing flexibility. We 
need to be able to operate as a business. We need to be able 
to--along the lines of what David Walker just said, the 
Comptroller General just said--we need to be able to adjust our 
rates. And we would like to be able to do that on an annual 
basis so there is no sticker shock, so that we are able to take 
into account what happens over the course of the year. And, 
last but not least, we need to have the ability to manage our 
infrastructure and to make what are going to be some tough 
decisions to modernize the Postal Service and make it more 
efficient.
    Those are the three things I believe are most important.
    Mr. McHugh. If I could come back down to General Walker.
    Mr. Walker. Large agreement. I believe you need to deal 
with the most immediate issues, which are military service and 
the escrow. I believe that it is important to provide 
additional flexibility to rationalize infrastructure and work 
force issues, and also to look at how rates are set. I think 
those are the three key issues that are of critical importance.
    Mr. McHugh. David? You have only got a year left or so; you 
can disagree with Jack.
    Mr. Fineman. Right. No, I am not disagreeing with anybody. 
I think that the bottom line here is that we have to be able to 
run a business that allows us to manage to the bottom line. As 
of now what we do is we say, ``OK, it is just a break-even 
proposition.'' I think that we have to add incentives that 
allow management to manage to the bottom line. Let them run it 
like a business, let them make a profit, let that profit be 
distributed to executives. Run it like a business. And I think 
that if you would manage to the bottom line, you might be able 
to bring about more productivity in a better-run service.
    And the ratemaking process, as somebody who sat on the 
Board for 8 years, I listened to David's testimony at the end 
when he talked about rate increases. I agree with you, David. 
The problem is, under the present process, what we are 
confronted with consistently is a process that makes no sense; 
so, therefore, we are put into a box. We are put into this 
terrible box where we say, ``If we raise rates, we will have a 
declining base of mail.'' And you know what? We can't raise 
rates for another few years because we don't have any 
flexibility. Under those circumstances, it becomes a business 
that is just unmanageable.
    Mr. McHugh. George, you might want to say something about 
your need for flexibility on the regulatory side.
    Mr. Omas. Well, I think there can be some flexibility. In 
my opening statement, I mentioned that I totally agree with 
flexibility. However, the Postal Service should realize that it 
is a government entity. They are an operator, and as an 
operator they should have a certain amount of oversight, and 
that oversight was recommended. It would be up to Congress to 
determine whether it is in the form of a regulatory board or 
whether Congress does that.
    But I think that serious thought should be given to the 
monopoly and to the universal service. Right now, the Postal 
Service defines both of those things, and the President's 
Commission recommended that go under the regulatory board. It 
views the Postal Service as the operator and the regulator as 
the government entity to oversee those things and to make that 
decision. And I think it would behoove Congress in their 
legislation to give guidance to both the Postal Service and to 
the regulatory board or to whomever would regulate those 
entities.
    And just in one other comment, we get beaten up about the 
process, the process, the process, the process. Mr. Chairman, 
we follow the guides of the law, of Title 39, and as a result 
we try to do the best job we can. Since I have become chairman, 
I have tried to open up and work and to experiment within the 
guides of the law to give the Postal Service more flexibility 
in the form of negotiated service agreement classifications, 
and we have settled over 14 cases since my tenure. And I think 
that the process is broken to some degree, and it needs to be 
looked at, but right now we do work within the guides of the 
law.
    Mr. McHugh. Well, let me say, I have had a lot of 
conversation with David Fineman, with Jack Potter, a lot of 
people in the postal administrative level, and it has never 
been an issue of the PRC not doing its job. It is the process, 
it is the law. And that is one of the things we are looking to 
streamline. And by the way, I certainly don't want to see 
Congress as a direct regulator in the Postal Service. We got 
rid of that in 1970, and good riddance.
    Mr. Secretary, we really do have to go vote. I think it 
would be unfair of me to ask you to pick amongst your 
principles. If you want to do that when we get back, you know, 
load up the gun and put it to your head and--I will be happy 
to. But as I said, in fairness, I think the Commission and the 
administration did a good job, and we will stick by that. So 
having said that, I would ask your patience, and we will be 
back as soon as we get finished with this vote. We will stand 
in adjournment.
    [Recess.]
    Mrs. Blackburn [presiding]. We will be called back into 
order and reconvene. I will take the Chair's spot until our 
chairman is able to return, and we thank you all for your 
patience. Of course, seeing that you are productive and viable 
and solvent is important to each and every one of us, and we 
appreciate your patience because we all do have some questions 
that we would like to ask and some things that we would like to 
get on the record. So if I may--and it looks like I am the only 
Member to finish my votes. I guess that just goes to show, if 
you want it done right, ask a woman; get it done right the 
first time.
    Secretary Roseboro, I think I will begin with the questions 
that I had wanted to ask you. If the Postal Service is to 
operate as a self-sustaining commercial enterprise, which we 
have heard mentioned repeatedly not only in the written 
testimony but the testimony delivered today, it needs--Mr. 
Fineman mentioned several times it needs to run like a 
business, we need to have it run like a business. Then--and 
everyone has mentioned flexibility and the importance of 
flexibility. What boundaries and flexibilities specifically--
and I am looking for specifics, not just generalities--but 
specifically should be given to the Postal Service to deal with 
the problems that you have, such as debt and deficits? And the 
reason I would like some specifics on this is because both in 
the written and the delivered testimony, there has been mention 
of the services delivered charging at a rate enough to cover 
the cost so that you would be self-sustaining. So if you will 
talk a little bit about the boundaries and the flexibilities to 
deal with those issues.
    Mr. Roseboro. Yes, thank you.
    We feel, again, as that principle outlined--and this ties 
into Chairman McHugh's question just before he left--what 
principle would we greatly endorse if we just had to choose 
one. Ensuring the self-financing principle of the Postal 
Service is critically important. And that would, in terms of 
specifics, actually dovetail well into what the previous panel 
members mentioned in terms of those specifics, which I would 
say the administration is in agreement with except for the 
disposition of the Civil Service Retirement System military 
funding issue.
    More specifically, again, with regard to the flexibility to 
respond to the macroeconomic environment and have some 
flexibility, or greater flexibility, to respond in terms of 
rates, as Chairman Fineman articulated earlier, the difficulty 
in the long-term process of being able to foster rate increases 
as needed in response to events is a burden, a liability on the 
Postal Service. To have flexibility as well on the cost side in 
terms of managing technology implementations, managing the 
development of the workforce as is directed toward the Postal 
Service's business needs we think would be key criteria to 
meeting this principle of self-financing with regard to that. 
As well the bottom-line objective or mandate of the Postal 
Service of having to break even, also we would be supportive of 
a bit more flexibility in that regard, given the variable 
nature of year-to-year, of ups and downs in the business cycle 
or other surprising challenges that are met. For example, if 
the Postal Service could retain earnings in the eventuality of 
or to plan for negative swings would be a specific prescription 
that--or flexibility that we think should be considered.
    Mrs. Blackburn. Now, when you talk about having some of the 
flexibility, and specifically looking at technology 
implementation, have you developed a plan of what you would do? 
Do you have a long-range plan? Do you have a time line on 
implementation? Or at this point are you just in broad-brush 
thinking, putting it down, putting a plan together? Where are 
you on that?
    Mr. Roseboro. We feel it is just appropriate at this time 
for it to be a guiding principle for postal----
    Mrs. Blackburn. But you have no specifics.
    Mr. Roseboro. No, we don't think it would be appropriate 
for us to have specific prescriptions in that area or many of 
the other areas, specifically because that would be more 
micromanaging business, which the Postal Service is in a better 
position to implement as well as address.
    Mrs. Blackburn. OK. And if you continue to operate at a 
loss for the next several years, what would be the appropriate 
actions to remedy that problem?
    Mr. Roseboro. We don't think there is any one action. 
Again, we would encourage flexibility on the revenue as well as 
cost side, a thorough analysis accounting in terms of product 
lines, activities of the Postal Service to make sure that all 
of those, the areas that it is involved in, are cost-effective 
and will serve its customers well.
    Mrs. Blackburn. So there are no specifics for how you would 
remedy that situation?
    Mr. Roseboro. No. We would rely on the Postal Service's 
management and its Board of Directors to address the specific 
drivers of those factors, that they analyzed them and managed 
them over the year, and would look to work with them as we do 
in terms of any borrowing needs they have through the Treasury 
directly, and working with Congress to address the other issues 
that they would need help with to remedy the specific problems 
that would arise driving the loss scenario which you described.
    Mrs. Blackburn. Thank you, sir.
    Chairman Fineman, I want to talk for just a moment about 
mail. You mentioned that--let's see. Your volume, your first 
class volume, was reduced by 3 billion pieces in 2003, and that 
first class mail is less than 50 percent of your total volume; 
and that overall your drop in first class mail last year was 
3.2 percent, which resulted in a $1.2 million loss. Am I 
correct?
    Mr. Fineman. $3.2 million loss in that category mail. Is 
that what you are saying?
    Mrs. Blackburn. In that category. OK. And standard mail has 
increased by 3.6 percent.
    Mr. Fineman. That's correct.
    Mrs. Blackburn. OK. What I would like to know is if you--is 
this a recent or a long-term trend? And then as you look at 
different revenue streams becoming more profitable, what are 
you all doing to maximize that, and where is your emphasis on 
growing those streams?
    Mr. Fineman. I am going to attempt an answer to your 
question, and I am going to ask the Postmaster General to 
comment on my answer afterwards, if that is OK with you.
    Mrs. Blackburn. Sure.
    Mr. Fineman. First of all, let me try to start with the 
recent and long-term effects. We began to see some of what we 
call diversion of first class mail sometime in early--around 
2000 you started to envision that it was happening. We knew 
that it was happening within society. But to a large degree the 
model that we have was based upon there being continual 
increases in first class mail. So what was happening initially 
was that the increases----
    Mrs. Blackburn. Excuse me just a moment. When was that 
model constructed?
    Mr. Fineman. 1970.
    Mrs. Blackburn. OK.
    Mr. Fineman. So what you began to see was that the 
increases were not the same as the increases had been 
previously. You no longer were having that same increase in 
first class mail. Remember, at the same time that we are 
getting decreases in mail, the fact that really comes home to 
you is that we are increasing the number of addresses that we 
are going to have to deliver mail to. Leave aside what the 
burden is. One would think naturally that what would happen is 
that if you increase the number of addresses about 1.7 million 
a year, because you have new homes that are being built--I kind 
of use the analogy, you know, somebody who played by the rules, 
sent all their kids to college, and they had three children. 
You know, one of them moved to Las Vegas, one of them moved to 
Arizona, the other moved around the corner, and Mom and Dad 
still stayed there.
    Mrs. Blackburn. They are the lucky ones. Some of them come 
back home.
    Mr. Fineman. Right. But we have three new houses to deliver 
to, and we still deliver to Mom and Dad. So we increase the 
number of houses. You would think, well, then you are going to 
increase the volume of mail. But it didn't happen that way. And 
we began to see clearly this decrease in 2002, you know, of 1 
billion pieces and 3 billion in 2003. And now the model is 
broken, and it is hard--if you read the President's Commission 
and our internal studies, it is very hard to predict. You know, 
if we went from 1 billion to 3 billion, does that mean that in 
2006 we are going to be at 9 billion? I am not quite sure that 
that is the number. And why is it so important?
    You know, when we construct the model--and the Postmaster 
General can comment upon this. But from our financial 
situation, first class mail is the largest contributor to 
overhead. So when you talked about we are increasing, the 
increase in standard mail, sure, the postperson who comes to 
deliver mail to your home is maybe delivering some more 
standard mail than they might have delivered previously, but 
they are delivering less first class mail, and there is less of 
a contribution for that.
    It is less--if we just talk about it in terms we would 
understand, we don't make as much profit on it, we don't do as 
well. Where are the opportunities? I mean--and that was the 
next question that you asked, I think. From our point of view 
as a board, we have asked management and management has made a 
big effort this year that what we want them to do is to 
increase the opportunities for revenue. We want to look at 
those opportunities within what is our business; not divert to 
e-commerce, not diversion to anything else, but within our 
business. We want to have postal people out on the street 
selling our product to small businesses. We want to increase 
the amount of marketing that we are doing within the 
advertising community and to other communities, and we have 
made a big effort this year, and we have asked the Postmaster 
General to make this one of his priorities, which he has done.
    And I'd ask the Postmaster General if he had any comment 
about my answer to that question.
    Mr. Potter. Let me just add that we are facing a structural 
issue here. Historically, as homes grew and businesses grew, so 
too did mail. And right now, our possible deliveries, the 
amount of deliveries we make, rises about 1.2, 1.3 percent a 
year. That's 1.8 billion deliveries, the equivalent of the size 
of the cities of Chicago and Baltimore. So we're growing at 
that level every year. Mail volume has not kept pace with that. 
If it were, we'd see a 1.2 percent growth in first class mail 
and in other classes of mail.
    Now the reason why first class mail has declined, there are 
a number of them. Right now we're not sure how much the 
economic conditions have caused the reduction of first class 
mail. We know that jobs are down and we think that there's a 
correlation between first class mail and people working. We 
also know that there's a structural change where mail is moving 
to the Internet. In addition to that, our standard product has 
gotten much better and first class mail is about 18 percent 
advertising. And people have bought down from first class mail 
to standard mail as a result of the better performance that 
we're giving it. So in a sense the service that we're giving 
has hurt us a little. But that in a nutshell is the problem 
that we have.
    Now, what we're doing to try and offset that are a number 
of things. First, we're very much focused on productivity, 
because if we don't improve productivity our only recourse will 
be to raise rates, assuming that volume doesn't grow. So our 
initial thrust has been to go after productivity to try and 
offset this increased infrastructure that we have to deliver to 
and we're delivering less revenue over a broader 
infrastructure--a broader delivery base. In addition to that, 
as the chairman said, we're going after growth this year. We're 
working with all of our customers to determine whether or not 
the decline that we've seen is a result of truly a structural 
issue that we'll never see the mail come back or whether there 
were other reasons why people aren't mailing. And I think over 
the course of this year we're going to learn a lot. 2001 and 
2002, 2003 were unique years. I think we're starting to see the 
economy rebound. We're hopeful that mail will rebound with it 
and we are going to work hard to help mail rebound with the 
economy.
    Mrs. Blackburn. OK. Now, if the Postal Service were limited 
only to first class and standard mail, then what effect would 
that have on your revenue and your infrastructure?
    Mr. Potter. First class and standard are about 90 percent 
of our revenue and obviously, therefore, the infrastructure 
wouldn't change that much because we'd still be going to every 
door every day. Some of our plant operations might be modified. 
But the fact of the matter is the bulk of the infrastructure 
would stay just as it is.
    Mrs. Blackburn. So those two combined are 90 percent. I 
thought first class was 93 percent. So I guess that was an 
incorrect figure.
    Mr. Potter. First class mail is about half of our total 
volume and it's about 65 percent of our revenue.
    Mrs. Blackburn. OK. All right. Chairman Fineman, again, 
let's talk about labor costs. And your labor costs are 80 
percent of your operating expenses, is that correct?
    Mr. Fineman. I think just about that. The Postmaster 
General whispered into my ear ``78 percent.'' I know we've 
always been in and around 80 percent for the last few years. 
It's been decreased on a percentage basis, but about 80 
percent.
    Mrs. Blackburn. And how does that compare to similar 
industries in the private sector?
    Mr. Fineman. It's difficult to answer that question because 
you've got to remember that we put it within a sector. You 
know, within--what sector would you compare us to? Would you 
compare us to some sort of service business or to other mailers 
who were doing other kinds of business? Similar to our 
business, that is, you know, UPS's mainstay is packages or 
FedEx's mainstay is----
    Mrs. Blackburn. You choose the examples. I'd just like to 
know.
    Mr. Fineman. Right. I'd suspect our costs are higher on a 
basis percentage. But maybe the Postmaster General can answer 
that question with specifics.
    Mr. Potter. I don't think there's a comparable institution 
out there that you can compare us to. We have a mandate to go 
to every door 6 days a week. No one that I'm aware of has such 
a labor-intensive requirement.
    Mrs. Blackburn. OK. That is fair. I still think that there 
are some comparisons that could be drawn with other services 
that are within your industry sector as you look at what your 
labor costs are and consider what those are and what it means 
to your bottom line.
    Let's see. General Potter, let me ask you, if I may, just 
one thing. On the integrated technology, how have you 
integrated technology into your operations as far as your 
productivity? You mentioned that was one of your focuses, so 
where are you with that?
    Mr. Potter. Where are we? Today 95 percent of all letter 
mail that comes into the Postal Service to be sorted is sorted 
on automated equipment. Today about 80 to 85 percent of the 
mail that a carrier brings to a door is walk sequenced by a 
machine. It's not sorted by a carrier. In fact it's not touched 
by the carrier until they get on their route. We have the most 
modern and efficient postal service in the world. We've made 
capital investments in automated equipment throughout the years 
to modernize ourselves. We have plans to continue along those 
lines that we're going to share with this committee in our 
response for more detail on our capital plan. We do have areas 
of opportunity and we're continuing to explore the notion of 
using capital to improve our productivity. We have never put a 
cap on expenditures when it comes to capital or automated 
equipment that has a return on investment. And we continue to 
make that our No. 1 priority when it comes to use of our 
capital resources.
    Mrs. Blackburn. And what percentage of your annual budget 
are you using on technology and equipment?
    Mr. Potter. We spend anywhere from $1 billion to $1\1/2\ 
billion a year on automated equipment.
    Mrs. Blackburn. OK.
    Mr. Potter. And as a matter of fact, when it comes to 
computer technology, IT technology, the Postal Service has and 
will replace its entire infrastructure of--from PCs to servers 
throughout the Nation--we will have, I believe if we don't 
already have, we will have a world class IT infrastructure. We 
do not minimize our investment when it comes to IT.
    Mrs. Blackburn. So 85 percent of your operations have 
transitioned to bar code or optical reader sorting; is that 
correct? Is that what you said?
    Mr. Potter. That's letter walk sequence and when it comes 
to oversize letter mail, flat mail, it's above 90 as well.
    Mrs. Blackburn. OK. Excellent. And Chairman Fineman, you 
mentioned the business model and the old model was constructed 
for you in 1970. Who is working with you on constructing a new 
business model? Are you outsourcing that? Have you brought a 
consultant in, or who is advising on that?
    Mr. Fineman. The board and management has been working 
closely to try to come up with what would be a new business 
model, and I look at your counsel here, I would only say that 
we've worked closely with this committee for almost 8 years now 
to try to construct a model that'll make some sense for the 
future. We've commented upon various pieces of legislation and 
have from time to time over the years submitted our own 
legislation, so we look forward to working with this committee 
to get legislation that we think can correct what is a 
deficient model that was constructed in 1970.
    Mrs. Blackburn. OK. Mr. Walker, I always enjoy my 
conversations with you. It's always great and I guess--may I 
continue questioning since no one else has shown up? And I did 
reserve my time. Y'all have to remember that. I didn't have an 
opening statement. If the Postal Service were subject to SEC 
reporting requirements, would they have sufficient financial 
transparency?
    Mr. Walker. No. They would need additional transparency in 
order to meet the SEC requirements. I will say that the Postal 
Service is making progress with regard to the transparency 
issue. They have done some things already. They've got some 
other plans in process right now. I would also say that one of 
the reasons that I didn't say that transparency was one of the 
areas that would necessarily require legislation is because 
people can do what they believe is the right thing without 
legislation and SEC registration. Specifically, the Board and 
management could decide that in substance they want to meet the 
SEC requirements and therefore wouldn't require legislation. So 
that's why it wasn't one of my top three priorities.
    Mrs. Blackburn. What about FFMIA?
    Mr. Walker. I don't believe that they would be totally 
compliant with that. As you know, they are focusing on the 
private sector model, and private sector entities aren't 
subject to FFMIA, and therefore, there would be some gap there.
    Mrs. Blackburn. OK. How would--or can you target anything 
that would--any specific that financial transparency would do 
to help with their efficiency and their operations?
    Mr. Walker. Well, clearly we believe that they need to go 
to--you know the SEC requires quarterly reporting, fairly 
extensive reporting with regard to not only financial results 
but also operating results and we think it's important that 
comparable to SEC information reporting should occur. I think 
another area that I have testified on from time to time, where 
some additional progress has been made but we think additional 
progress is necessary, is the Postal Service's significant 
retiree health obligations, which were estimated to be between 
$47 and $57 billion in current present value terms.
    Mrs. Blackburn. And one last question. What would be your 
assessment of the management structure that is in place at the 
Postal Service?
    Mr. Walker. You mean how much management, the layers of 
management?
    Mrs. Blackburn. Correct. The layers, right.
    Mr. Walker. We have not done a separate, independent 
assessment of the management structure. Let me just say this, 
Madam Chair: I believe that the Postal Service needs to be 
subject to the same thing that much of the Federal Government 
needs to be subject to, and that is what I'm going to refer to 
as a baseline review. The Postal Service is doing many good 
things and they've made a lot of progress in the last couple of 
years under the leadership of Chairman Fineman and Postmaster 
General Potter. But they face a major challenge; their business 
model is based upon the 1970's. The world is fundamentally 
different. On my belt I have two of their competitors. I have 
little doubt in my mind that there are permanent structural 
changes that have occurred. Reasonable people can differ as to 
what the magnitude is and whether some things are just timing 
differences with regard to employment levels, etc., but I think 
they're going to need to fundamentally reassess their 
infrastructure, their human capital policies and practices, 
their rate-setting, and what the scope of their business ought 
to be. I mean, getting back to the core business, if you will, 
capitalizing on their inherent assets--which is the first mile 
and the last mile--capitalizing on what they can do to also 
generate additional revenue or cost-sharing dealing with their 
significant infrastructure, I think there are real 
opportunities. But I think it's a fundamental review and 
reassessment, including the ratio of management to individual 
contributors, how many layers, how many levels. I think it all 
has to be reviewed and reconsidered.
    Mrs. Blackburn. Thank you, sir. I see that our chairman has 
returned and I also know that Mr. Roseboro needs to be excused, 
that 5 is the time that you need to depart.
    Mr. Roseboro. Yes, unfortunately. I have a prior commitment 
with some of your other colleagues on another issue, but any 
questions that yourself or any other committee members have 
I'll be glad to answer in writing back to the committee.
    Chairman Tom Davis. I had one burning question, Mr. 
Roseboro, for you that I just can't resist. Are you related to 
John Roseboro?
    Mr. Roseboro. A distant cousin.
    Chairman Tom Davis. He was one of my favorites, so I 
couldn't help but ask that question. The others I'll write.
    Mr. Roseboro. Thank you.
    Mrs. Blackburn. Mr. Davis, would you like to be recognized 
for questions?
    Chairman Tom Davis. Thank you, Madam Chairwoman. I guess 
I've really got a whole bunch of them, but Mr. Postmaster 
General, in your testimony on page 6, you expressed concern 
over the Presidential Commission's recommendations to limit the 
Postal Service to activities directly related to its core 
mission. You state that the Postal Service needs to maintain 
the flexibility to pursue appropriate revenue streams in areas 
related to core businesses. Yet Chairman Fineman mentioned some 
difficulties the Postal Service has had such as in e-commerce. 
Could you elaborate on the type of flexibilities you have in 
mind when you----
    Mr. Potter. Yes, Congressman. What I've observed around the 
world is that other Postal Services have the same challenges 
that the U.S. Postal Service has. And what they've done is, 
they've looked at their infrastructure to determine whether or 
not there were opportunities to take advantage of the 
infrastructure that they are trying to maintain. So, as an 
example in the retail arena, in other posts around the world, 
they use that retail service to offer banking access to 
communities that may not have a bank. And so when I talk about 
other services, I'm talking about within the structure of the 
facilities that we have to maintain. I'm not talking about 
becoming an e-commerce company. But the fact of the matter is, 
we have a lot of trucks and other folks have gone beyond mail 
and are using those trucks and moving into the whole area of 
logistics and moving freight. And I don't think that going 
forward we'd want to preclude that the only thing that the 
Postal Service could do with its infrastructure would be to 
deliver, you know, a 1-ounce letter. And I think we should be 
open-minded about that going forward.
    Chairman Tom Davis. I attended--and this might be for each 
one of you because it can be fairly brief--I attended a union 
meeting a few weeks ago, and I thought I was at--well, I don't 
know what I thought I was at because there was a tremendous 
amount of frustration displayed at that particular meeting in 
terms of fears that the individuals there were expressing about 
things that were already happening such as excessing. They were 
highly frustrated by that but also by the possibility that 
there may be serious closures, that there may be a serious 
reduction in personnel, that there may be conditions changed 
from what they were accustomed to, that our definition of 
universal service may be restructured and changed. How would 
you respond to those fears that are being expressed, especially 
by individuals who work for the Postal Service?
    Mr. Potter. Well, Congressman, I hear those fears all the 
time. In fact, one of the reasons that we agreed to a contract 
well in advance of contracts expiring with a couple of our 
major unions was in response to concerns of some of our 
employees regarding layoffs. And I, as a result of those 
contracts--those contracts contain no layoff clauses--I wanted 
to assure every one of our craft employees that there are no 
plans to lay off those employees. However, the fact of the 
matter is, Congressman, that mail volume is declining and 
mailers are changing the way they present mail to the Postal 
Service. When I began my career in the Postal Service, every 
piece of mail that left Washington, DC, and was bound for 
another part of the country was handed to the Postal Service. 
Today there are rates that allow people in Washington, DC, to 
truck their mail across the country and deposit it for a 
discount. All those folks that used to move the mail from one 
end of the country to the other are no longer needed because of 
the fact that there's been a change, a behavioral change on the 
part of mailers. And again, it was in response to a discount, 
but they've changed their pattern of deposit of mail.
    What we've done is we've looked through this network and 
we've determined that there are people who are not as 
productive as we'd like them to be, and we do need to move them 
to more productive jobs. The security is that they won't be 
laid off. They will have to move to where the work is. We can't 
have unproductive people. And we're trying to be as 
accommodating as we can and as considerate as we can about 
their individual needs, but we need to react to what's going on 
around us. As far as I'm concerned, if you look at the long-
term viability of the Postal Service and the security of these 
folks' jobs, we need to react today and we need to react 
together, working together to ensure that we don't have a 
situation where rates could rise precipitously, as I said in my 
testimony, because we don't address those places where we're 
not as productive as we could be.
    Now, the fact is, and I would share the concern of folks, 
we've dropped over 80,000 people in the last 5 years. Since 
1999 we've dropped 80,000 career employees. We've done that in 
response to what's gone on with the mail. We've done it as a 
result of investments that we've made in technology and 
automated equipment. And as you can see, from everyone that's 
talking here today, it doesn't appear to be enough. So we need 
to continue to change. I think our employees understand that we 
need to change as society changes, as use of the mail changes, 
and again we're trying to work with people, keep them informed 
and we want to assure them and have assured them through the 
contracts that we do not plan to lay them off.
    Chairman Tom Davis. Mr. Walker, do you have any ideas 
relative to how long it might take the normal rate of attrition 
that's being dealt with as well as the efficiencies that are 
being developed before we reach a point where there would in 
all likelihood have to be some serious postal changes?
    Mr. Walker. Well, I am not privy to all the detailed data 
the Postmaster General would have. I will say this from a 
conceptual standpoint: change is inevitable. The fact of the 
matter is, if you look at the trends and challenges that face 
the Postal Service in the United States and what's occurred 
over the last 40 years and what's likely to occur in the future 
as we end up updating the business model, there are going to 
have to be changes in a variety of areas, including in the area 
of the work force.
    Now what the Postmaster General has tried to do is to try 
to avoid layoffs, and the way he's done that is through the 
bargaining process. I would respectfully suggest, I personally 
am a strong believer in collective bargaining and to have the 
parties try to work these things out. The fact of the matter is 
that they do have shared interests to the extent that the 
parties can end up making sure that compensation is reasonable 
and competitive in the aggregate sense, to the extent that the 
parties can end up increasing flexibility for work rules and 
utilization of the work force. That can help to minimize, delay 
and hopefully avoid in some cases any layoffs that might 
ultimately have to occur down the road. But I think the bottom 
line is that normal attrition can help you get to where you 
need to be, but you don't necessarily have the amount of 
attrition at the time in the areas that you need in order to 
get the job done. And so that's why you have to do a much more, 
I think, sophisticated work force planning effort to try to 
understand where are we, where we think we're going to need to 
be, how we are going to get there, how much of it can come 
through normal attrition, how much can come through early outs 
or other types of mechanisms, and where might there be some 
other opportunities to redeploy the work force and still 
maintain employment opportunities at reasonable wages.
    Mr. Potter. If I could add, we have a great opportunity 
right now because today the Postal Service has over 120,000 
employees who are eligible to retire. We have another 130,000 
who will be eligible within the next 5 years. So there is an 
opportunity to make the kind of structural changes that we 
think might have to happen and do it through the collective 
bargaining process, do it in an employee-friendly way. Now that 
doesn't mean that we're not going to change people's schedules. 
We may ask them to, you know, drive down the road 5, 10 miles 
to be employed but they will be employed and we are working 
through that process with the unions and with individual 
employees to deal with issues that people are going to have 
with change.
    Chairman Tom Davis. Well, thank you very much, Mr. 
Chairman, and I thank you gentlemen. I'm going to have to leave 
in order to catch a flight tonight. But I would say that I 
really appreciate the candor of your testimony. I'm reminded of 
something that Lyndon Johnson used to say and that is speak 
truth to the people. There are no gains without some pain. And 
so it looks as though there's going to be some pain. But we 
obviously want to make that pain as narrow as possible.
    So I thank you very much and I thank you, Mr. Chairman.
    Mr. McHugh [presiding]. I thank the distinguished 
gentleman, wish him a safe flight and, as always, greatly 
appreciate not just his participation but his leadership.
    First of all, I want to apologize to everyone for my 
tardiness in coming back. I had a must-do conference call with 
Senator Clinton. We had an unexpected plant closure in my 
district and it was just unavoidable. I would have rather been 
here, trust me, given the topic of that call. As such, I was 
not privy to a lot of the give-and-take and the Q-and-A, but 
having had the opportunity to talk to most of you in the past, 
I suspect I note the tenor.
    I would just put in an editorial comment. Well, let me ask 
one question, because I hear some back-and-forth about parcel 
delivery, and that not being the core which is absolutely true 
of the Postal Service's revenue stream, etc. And we've got a 
lot of great private parcel carriers in this country. Two 
particularly come immediately to mind. I'm not providing them 
free advertising time, I'll just leave it at that. But as 
someone who lives in the rural part of the country I place a 
particular value on that option for the folks that I represent, 
because there are some higher cost alternatives, but the Postal 
Service is an important alternative to those. And did I 
understand, Mr. Potter, you to say that in the immediate future 
you do see parcel delivery as part of your mission? I mean, 
after all you have a parcel delivery agreement, do you not, 
with one of those companies as we speak?
    Mr. Potter. I think parcel delivery is a core product of 
the Postal Service. The questioning was along the lines of how 
much of your business is first class mail and standard mail and 
I answered those. And if the attempt was to try and minimize 
our commitment to parcels, certainly I wasn't trying to portray 
that in my response. There are many Americans who rely on 
access to parcel services to put a parcel into the system, 
using our 38,000 outlets. We deliver to communities without a 
surcharge that others would surcharge. I think we provide a 
vital service to America when we deliver parcels, and our 
intent is to make sure that we continue to do that well into 
the future.
    Mr. McHugh. Yes, sir. Mr. Chairman.
    Mr. Fineman. Congressman, can I just make one comment, 
which is, there's no reason--and one of the things that the 
board has looked upon favorably, former Governor McWhorter, who 
was Governor McWhorter, the former Governor of Tennessee, I 
remember him commenting upon this. He just left our board. 
There's great opportunity here. There's no reason why there has 
to be this friction. We deliver to the last mile, to every 
household, to all those rural areas that you represent. We are 
beginning to work with those that have been considered to be 
our competitors, beginning to work with them as they realize 
that we can do that in a fashion that they might not be able 
to. And therefore, it would cost the customer less money for 
them to deliver the packages to the Post Office some place in 
your congressional district and let our letter carrier deliver 
it the last mile rather than them having a truck that delivers 
one parcel to one little town in your area and another parcel 
to another little town. That costs a lot of money. Our people 
are on the street all the time. So we look forward to working 
with them. There's no reason we have to be antagonists.
    Mr. McHugh. Well, I wish you well in that, and certainly in 
theory that's absolutely correct. I couldn't agree more. You 
know, in fairness, there are some competitive issues, 
equitability and competitiveness, that need to be addressed. I 
mean they have the right to make a dollar and to make a lot of 
dollars and they have and they should continue in the future. 
But I just wanted--because I kind of caught the back end of 
that conversation--I just wanted to make sure that the record 
showed what I thought was the case. And I appreciate that 
clarification.
    Anybody want to say anything? General Walker.
    Mr. Walker. Mr. Chairman, I think it is important that the 
Congress get as much done as quickly as possible. Earlier, 
there was a discussion about if you couldn't do the whole 
enchilada this year, whatever that is, then what are the most 
critical elements? I think my comments were very consistent 
with Postmaster General Potter's and the others' comments. But 
those are in fact essential, essential that those be addressed. 
It is desirable that more than that be addressed but those 
three elements I believe are essential.
    And on the issue of transparency, I think much can and 
should be done without legislation there and hopefully that'll 
get the job done without legislation. That's something we can 
always go back and revisit if for some reason people don't 
voluntarily do what is arguably the reasonable and appropriate 
thing to do.
    Mr. Omas. I would like to concur with Mr. Walker that 
legislation is definitely needed. However, I would like to take 
this opportunity to commend Postmaster General Potter and Mr. 
Fineman for the cooperation that we have been able to pull 
together in the last year or so and I'd like to thank them. And 
I know the mailers and the stakeholders are appreciative. We 
have started programs whereby the Postal Service will brief us 
on new costing methods as well as the fact that the 
commissioners meet several times a year with the Board of 
Governors to discuss various issues. So we do need legislation, 
but we're trying to work within the parameters, which we will 
endeavor to do until there's legislation that changes that.
    Mr. McHugh. Well, I appreciate that, George, Mr. Chairman, 
and it is important and there are a lot of opportunities to 
have everyone work more cooperatively together. And General 
Walker mentioned transparency and then the rate-setting process 
that, as you noted earlier, Mr. Omas, is a problem that you are 
dictated to in terms of the structure, the procedure, and we 
need to update that. I think--I'm a big believer that if we're 
going to provide this flexibility then I think everyone in this 
room knows I believe in very, very strongly, but an empowered 
regulator of some sort, an overseer outside the Congress is 
equally important and subpoena power and such and such. So you 
know I am sure that those are things that we are going to be 
looking at. But the main objective at the end of the day is to 
have a Postal Service that continues to be what it has been for 
over 2 centuries, and that is the lifeblood of communication in 
this country for the foreseeable future, and that's what we are 
going to do. And to that extent I want to thank all of you 
gentlemen. You've been terrific on this and leaders, and over 3 
hours we'll get you a couple more gold stars.
    So with that and our appreciation, we'll adjourn the 
hearing until we reconvene in the windy city of Chicago next 
week. So y'all come.
    [Whereupon, at 5:20 p.m., the committee was adjourned.]
    [The prepared statements of Chairman Tom Davis and Hon. 
Candice S. Miller follow:]

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[GRAPHIC] [TIFF OMITTED] T3087.081



     ANSWERING THE ADMINISTRATION'S CALL FOR POSTAL REFORM--PART II

                              ----------                              


                       THURSDAY, FEBRUARY 5, 2004

                  House of Representatives,
      Special Panel on Postal Reform and Oversight,
                            Committee on Government Reform,
                                                    Washington, DC.
    The special panel met, pursuant to notice, at 12:56 a.m., 
in room 2525, Dirksen Federal Courthouse, 219 South Dearborn 
Street, Chicago, IL, Hon. John M. McHugh (chairman of the 
special panel) presiding.
    Present: Representatives McHugh, Schrock and Davis.
    Staff present: Jack Callender, counsel; Brien Beattie, 
deputy clerk; Allyson Blandford, office manager; and Michael 
Layman, professional staff member.
    Mr. McHugh. Particularly because we have our first panel of 
esteemed witnesses, no one would object if we gavel in a few 
minutes early. Two words, snow storm, four words, airplane. I 
know that is one word, but I think we want to make sure that we 
have the opportunity, as much time as possible to hear from our 
distinguished panelists in a way that provides opportunity for 
those who may have other destinations this evening to make 
those.
    So first of all let me thank all of you in the audience and 
certainly our presenters, our witnesses, for joining us. I 
should say particularly it is a thrill to be here once again in 
the hometown as I understand it, actually the home district, of 
our ranking member, my friend and partner in this thing called 
postal reform for a few years now, Congressman Danny Davis. 
Danny, thank you for your hospitality, sir. You have a nice 
place here, I have to say.
    The last time, as I mentioned, that I came to Chicago, was 
for a postal hearing as well. That was in October 1996. The 
subject of that was the, shall we say, less than optimal mail 
service that was being experienced in the city and now, nearly 
7\1/2\ years later, while we are here clearly to discuss the 
future of the Postal Service and where the Postal Service 
itself goes tomorrow and the day after, it is important to note 
that the mail service quality that we came to hear about those 
7 plus years ago has dramatically, dramatically improved. And I 
do not think there is any question as to how that has happened. 
Certainly the main reason for those strides in mail service 
improvements are the hundreds and thousands of men and women 
who are represented by our witnesses here today.
    You can argue, as my opponents do every even numbered year, 
that I do not know much, but there is one thing I know for 
certain and certainly something that became clearly obvious to 
me coming out of that first Chicago hearing. The key to 
universal service, the key to our universal and uniform pricing 
provisions for all Americans wherever they might live, the most 
important fact in America is enjoying the most affordable, 
reliable, service-oriented mail system found anywhere on the 
planet is the work of the professional postal employees and the 
facilities out on the routes stretching to every corner of 
every community in this great land.
    And as we undertake the effort to try to make necessary 
changes to the Nation's postal laws, I certainly never do, and 
I hope none of us ever want to take for granted and never 
forget those that not only make the system work but understand 
too how important the mails are to every U.S. citizen. Even if 
every American, because of their busy schedules, really never 
gives much thought to that fact themselves, have never really 
had to, because the postal employees always have been there and 
I suspect, and it is a dangerous thought, in their minds that 
postal employees will always be there no matter what. And that 
is why we are here today, to ensure that happens, because 
without, in my opinion, some definitive actions soon that may 
not be the case.
    And I welcome--we have two esteemed panels of witnesses for 
this second in a series of three hearings entitled, ``Answering 
the Administration's Call for Postal Reform.'' The presidents 
of all four postal unions and three management associations 
have made the journey here to Chicago. We are honored, 
gentlemen, by your effort to be here and your presence and your 
concerns. And I think it is important to stress the gravity of 
the matter that faces us today.
    The Postal Service is the focus, is the source, of nearly 
$900 billion in industrial activity. We have talked a lot about 
economic development and economic activity. The Postal Service, 
$900 billion is what it represents and it employs 9 million 
workers nationwide, and it represents some 8 percent of the 
entire domestic product of the United States of America. That 
is an incredible figure--8 percent--and in my opinion the 
Postal Service is in trouble and it requires reform legislation 
to prevent a meltdown. I believe there is a good reason why 
this is the first administration since Richard Nixon to call on 
Congress to modernize our postal laws. I remain hopeful as 
Congress did back in 1970 that we too and this panel and in 
this Congress will do so in 2004 and answer the President's 
charge.
    And last week we heard from the Postal Service itself, we 
heard from the administration, we heard from the Rate 
Commission, we heard from the General Accounting Office [GAO]. 
And we heard that universal postal service is at risk and 
reform is needed to minimize the danger of significant taxpayer 
bailout or dramatic postal rate increases. While Congress 
provided last year--and I think in a very important step--a bit 
of financial breathing room for the Postal Service when we 
reduced its payment for pension obligations, the fundamental 
challenge, fundamental problem, remains unchanged and that is 
that the Postal Service's current business model is not 
sustainable going into the 21st century.
    And last week at that hearing I mentioned, we heard the 
Postal Service still faces about a $90 billion obligation 
liability despite passage of the pension bill last year. Total 
mail volume declined for the third year in a row. It is a 
historical first for the Postal Service, which has depended on 
larger mail volume year in and year out to help to cover the 
cost and cover rising costs and mitigate rate increases. First 
class mail volume declined by 3.2 percent in 2003, and it is 
projected to continue to decline for the foreseeable future. 
And this is particularly serious because first class mail 
revenues cover more than two thirds of the overhead cost of the 
U.S. Postal Service. And as GAO noted, the Postal Service's 
revenues are budgeted for zero, no growth, flat line growth in 
2004. And should that happen, it would be the first time since 
postal reorganization in 1970 that postal revenues had failed 
to increase.
    Those are just the highlights, some would understand we 
call them the low lights, of the problems which disturbingly go 
on and on. Changes in the mail mix, increased competition from 
private delivery companies, declining capital investment, 
insufficient increases in postal productivity, uncertain 
funding for emergency preparedness as we have seen in the past 
several days in Washington with now not anthrax but ricin 
poisoning possibly, maybe probably, in the mail. And major 
challenges continu to continued cost cutting.
    While the problems are dire, I think the administration's 
principle for legislative changes show us a path, show us some 
solutions that can build on the now more than 8 years of this 
postal reform committee, and fortunately we have a strong 
bipartisan basis upon which to proceed, including the well-
refined bill that Congressman Davis and I and Congressman 
Waxman, Congressman Burton and Congressman Tom Davis helped put 
together in the last Congress. And the Postal Service is too 
important an institution to our economy to await the full brunt 
of a crisis that is clearly upon our doorstep. And over the 
past 9 years, the structure of this oversight body has changed. 
We have been a full committee, a subcommittee, a special panel. 
But whatever you call us, our goal has remained constant: to 
try to address those issues that confront the postal employees 
today, and plan for timely action on those challenges that lie 
ahead. And there is no greater matter confronting the Service 
than the future of our Nation's postal system.
    So, with that I would like to thank all of our witnesses 
for appearing. I want to particularly appreciate Congressman Ed 
Schrock, the gentleman from Virginia, who made the long trip 
here to join us. Ed, good to see you. Obviously, through his 
mere presence he shows his commitment and concern about this. 
And most of all, I would like to yield to, as I said, my 
partner in this process and someone who has been as devoted and 
some say as headstrong in this effort as I have. I mean that as 
a compliment, Danny. I am not sure everybody would but, Danny 
Davis.
    Mr. Davis. Thank you very much. You know, Mr. Chairman, no 
matter what the structure--I was thinking that you have been 
there whether it was a full committee, subcommittee or a 
special panel, you have been there leading the way, and I want 
to commend you for your steady, long, tedious attention to 
these matters and to these issues. And I also want to thank you 
and Congressmen Schrock for coming to Chicago. It is not 
everybody who would want to come to Chicago February 1st. It is 
indeed an inviting city, but it also has some characteristics--
we have a lot of things to offer--Wrigley Field, Soldier Field, 
Marshall Field, and we have some wind that blows, but it is 
still Chicago and we are delighted that all of you are here.
    I also want to thank all of those who have come as 
witnesses to discuss issues concerning postal reform. I am 
pleased to welcome you and note that this is the second in a 
series of meetings to consider the need and prospect for postal 
reform. We began the 108th Congress on a very positive and 
productive note. We passed and subsequently enacted into law 
legislation correcting the calculations of postal payments to 
the Civil Service Retirement System. As consumers and members 
of the postal mailing community know, this change in postal 
pension law allowed the Postal Service to reduce its 
outstanding debt and hold postage rates steady until 2006. The 
Postal Service received a financial break and so did the 
public. As we begin the second session of the 108th Congress, 
obviously we have a great deal of additional work to do.
    First, because of the fact that we created an escrow 
account in the postal pension law, the Postal Service must 
provide us a workable plan on its capital investments for our 
productivity gains and cost saving initiatives. I am pleased to 
note that the plan was delivered a couple of days ago. As for 
postal reform efforts, we are now moving at a positive pace, 
picking up on a much more positive note than where we left off 
in the 107th Congress. Using Chairman McHugh's Postal Reform 
Bill, H.R. 4970, as a starting point, we are working on 
establishing a strong foundation for reform. To date, our 
staffs have met with several postal stakeholders to solicit 
their recommendations for positive changes. In addition, the 
recommendations submitted by the President's Commission on the 
Postal Service in July 2003 and the administration's principles 
for postal reform are critical to the process. I look forward 
to hearing the testimony from our outstanding labor unions 
represented in addition to our witnesses' thoughts on the 
Presidential Commission's recommendations, and I look forward 
to hearing about whether we have done a good enough job in 
making sure that postal employees are safe from biological 
hazards like anthrax or ricin.
    Moreover, I am concerned with the issue of excesses. I am 
also pleased that both the House and Senate are fully engaged 
in the issue of postal reform. It is my hope that with 
continued bipartisan support and the leadership you have all 
demonstrated that we will obtain the goal of assuring that our 
postal system continues as an effective instrument, as an 
effective vehicle through which people in this country can 
continue to communicate.
    Mr. Chairman, again I thank you for coming to Chicago, I 
thank all of those who have been involved in getting us to this 
point, and look forward to the testimony of our witnesses.
    Mr. McHugh. Thank you very much, Danny. I cannot tell you 
how very much I appreciate the devotion you have brought to the 
subject. We have been up and down and around, and through it 
all the one constant has been you sitting there trying to do 
the right thing. And it is an admirable quality and I am proud 
to call you my partner in this.
    I would be delighted to yield now to a gentleman, as I 
said, who made a particular effort to be here today, a good 
friend of mine and a great American and a great Virginian, the 
gentleman from Virginia, obviously, Mr. Schrock, Ed.
    Mr. Schrock. Thank you, Mr. Chairman, thank you for holding 
this second hearing on the administration's call for postal 
reform. Danny Davis said if I would be willing to come here he 
could guarantee me some warm weather. But I guess I am going to 
have to come back for that. Two of my closest friends, both of 
whom were in my wedding, live in Naperville, my wife has an 
aunt and an uncle that live in the Chicago area. So, I do know 
you have good weather and I think I am going to have to come 
back for that.
    Thank you also to the witnesses for being with us today to 
provide your organizations' views on the Commission's report 
and the next process and the next steps in the postal reform 
process.
    As we all know, tackling postal reform is no easy task. 
Every American is a stakeholder in the viability and future of 
the Postal Service and thousands of American companies rely on 
the Postal Service to do business. But the men and women at the 
Postal Service who provide the services that keep our mail 
moving are a valuable commodity and I look forward to hearing 
from their representatives today.
    The President's Commission focused a great deal in their 
report on right-sizing the Postal Service and its processes, 
including adopting a faster and simpler rate-setting process, 
consolidation and rationalization of the postal facility 
network, and developing an appropriately sized work force at 
all levels of the postal work force structure. After reading 
through your testimony, it is clear that you and your members 
do not agree with all the Commission's recommendations, and I 
know that you and I will probably disagree on a number of their 
recommendations. But I think there is a great deal of room 
where we can work together to implement legislation that will 
benefit the future of the Postal Service, its employees, and 
the postal customers, and frankly, I would not have traveled 
here today if I did not think so. I could have been home in 
Virginia Beach where it is not much warmer, but a little bit 
warmer. So, I look forward to your testimony today and a 
healthy dialog about how we can ensure a positive and thriving 
future for our Postal Service.
    And again thank you, Congressmen Davis, for welcoming us 
here, and thank you, Mr. Chairman, for holding this second 
hearing.
    Mr. McHugh. Thank you, sir. In the interest of full 
disclosure I want to say two things: One, I came here for the 
good weather: my district borders Canada and 2 weeks ago it was 
42 below zero; this is beach weather, I think Chicago is. 
Second of all, I think every politician has dreams and every 
politician has nightmares. My nightmare is when I wake up 
sitting where these gentlemen are in a Federal courthouse 
having to take an oath of office. So, it is good to be awake 
and the reason I say that is that these gentlemen know we now 
have to take an oath to actually begin the hearing as it is 
committee policy. If the gentlemen will rise, I will administer 
the oath. Raise your right hands please.
    [Witnesses sworn.]
    Mr. McHugh. The record will show that all the witnesses 
responded in the affirmative. We are not going to turn on the 
light yet, we are going to do that when we get to the questions 
and answers, which is, as I am sure most of you know, the 5-
minute limit. We have all of the written statements from both 
panels here today and, without objection, I would ask they all 
be entered into the record in their entirety. Hearing no 
objection, so ordered.
    Gentlemen, to the extent it is possible, we would ask you 
to summarize your comments, but however you choose to proceed 
we are very grateful for your presence here today; most 
importantly, grateful for your leadership and for the 
membership that you represent, who are, as I tried to indicate 
in my opening statement, some amazing people doing an 
incredible job. Thank you for your service, thank you for being 
here and we are very anxious to hear your comments. I imagine--
oh, there it is. Thank you, Robert, we have to read them as 
they are written here. The first panel--and as I am quickly 
scanning I believe that it is going from my left to right, from 
the audience's right to left--Mr. William Burrus, president of 
the American Postal Workers Union; good to see you. Mr. William 
Young, president of the National Association of Letter 
Carriers; thank you for being here. Mr. Dale Holton, who is 
president of the National Rural Letter Carriers Association, 
someone I am familiar with and his people. Mr. John Hegarty, 
who is national president, National Postal Mail Handlers Union; 
John, thank you. Gentlemen all. It makes sense to me that we 
begin with testimony as we presented you, so with that, Bill, 
we would be anxious to hear your comments, sir, and welcome.

  STATEMENTS OF WILLIAM BURRUS, PRESIDENT OF AMERICAN POSTAL 
WORKERS UNION, AFL-CIO; WILLIAM H. YOUNG, PRESIDENT OF NATIONAL 
   ASSOCIATION OF LETTER CARRIERS; DALE HOLTON, PRESIDENT OF 
 NATIONAL RURAL LETTER CARRIERS ASSOCIATION; AND JOHN HEGARTY, 
   NATIONAL PRESIDENT OF NATIONAL POSTAL MAIL HANDLERS UNION

    Mr. Burrus. Thank you, and good afternoon, Mr. Chairman and 
members of the special panel. Thank you for providing me this 
opportunity to testify on behalf of the more than 300,000 
members of the American Postal Workers Union. Arguably, the 
APWU is the largest single bargaining unit in the country, and 
we appreciate your foresight in addressing the structural 
weaknesses of the Postal Reorganization Act as applied to 
conditions in the present and beyond. In response to the 
chairman's request that we limit our remarks to 5 minutes, I 
have abbreviated my oral testimony but ask that the full 
statement be entered into the record.
    This hearing is called to review the current state of 
postal services, and to consider legislative change to ensure 
its viability far into the future. Over the past 3 years, mail 
volume has declined, and there is concern over the future of 
first class mail. The generally accepted view is that the 
expanded use of technology has been and will be at the expense 
of hard-copy communications. Our union shares the concern of 
the mailing community, but we caution against drawing firm 
conclusions based upon the experiences of the past 3 years.
    But, whether mail volume increases or decreases, the need 
for a viable Postal Service will continue. Despite the effects 
of Internet communications, facsimile machines, and the 
telephone, the unifying role of the Postal Service will be 
critical. But while others are absolutely certain of the 
future, I offer a note of caution. At this time, the facts 
simply do not support a conclusion that the Postal Service is 
in a death spiral.
    We must remember that postal volume was affected by several 
national events. The first was the terrorist attacks of 
September 11, followed by the anthrax attack that took the 
lives of two postal workers, members of my union. The combined 
effects of the September 11 and anthrax attacks were 
superimposed over the recession that began in early 2001, and 
from which we are only now experiencing a relatively weak and 
inconsistent recovery. If one were to extract the impact of 
technological diversion, these events standing alone would have 
had a serious impact on postal volume. There are positive 
signs. The Postal Service recently reported that mail volume 
during the 2003 holiday mailing season increased sharply over 
the previous year, resulting in the highest volume period in 
the history of the Postal Service. Are we to believe that 
technological impact took a holiday this Christmas season, or 
are other factors at work?
    I wish to make an important point on the subject of future 
mail volume and the impact on the Postal Service's ability to 
provide universal service. It is not the business model that 
determines the relative contributions to overhead cost of first 
class mail as compared to standard mail. As first class mail 
grows or declines, the question of dividing institutional costs 
among all classes of mail will remain. At present, it takes 
approximately three pieces of standard mail to make up for one 
piece of first class mail. This distribution of costs is a 
rate-setting decision that will be unresolved by postal reform.
    In your invitation to testify today, you asked that I pay 
particular attention to the five principles outlined by the 
administration, and I will. Clearly, there is a consensus that 
the Postal Service performs a vital public service, and that it 
must be preserved and maintained. However, it is difficult to 
tell from the five principles what specifically the 
administration supports. Our union supports the broad 
principles of the administration, but as they say, the devil is 
in the details. We have some very strongly held views about how 
the principles must be carried out, and we are aware that 
others believe that these same principles justify changes which 
we adamantly oppose.
    The first principle stated by the administration is that we 
should, ``Implement best practices that ensure that the Postal 
Service governing body is equipped to meet the responsibilities 
and objectives of an enterprise of its size and scope.'' We 
find little to disagree with the direction to implement best 
practices in managing and operating the Postal Service. Many 
private and public entities have adopted practices that should 
be considered by the Postal Service, while taking into account 
the unique role of this government entity and its role in 
binding our Nation together.
    The relevant question is, what are the best practices that 
should be adopted to preserve and protect the Postal Service? 
Some who propose what they call best practices have advocated 
regressive labor policies that would roll back the clock to 
1970. The report of the Presidential Commission includes a 
number of such recommendations, which we adamantly oppose.
    It is completely inconsistent and totally unacceptable for 
the Commission to espouse a commitment to collective bargaining 
while simultaneously recommending that postal compensation be 
dictated by an appointed board. The Commission seems to believe 
that postal workers are fools. The following disingenuous 
platitudes appear in the report: ``Plans for modernizing the 
Nation's postal network must effectively utilize the Postal 
Service's most valuable asset, it employees.'' ``Essential to 
this process is the ability of management and labor to work 
constructively together.'' ``First and foremost, the Postal 
Service management must repair its strained relationship with 
its employees.''
    Those are fine statements but in contrast to those 
statements, the Commission's specific recommendations are an 
invitation to open conflict with postal employees. The report 
paid lip service to the importance of good labor relations, 
while making recommendations that would ensure labor conflict.
    The Commission also urged Congress to consider removing 
postal employees from Federal retirement and retiree health 
care plans. This would be a diametric departure from 
appropriate public policy. We categorically reject the 
contention that it would be appropriate for postal employees, 
now or in the future, to be paid fringe benefits that are less 
than those provided to other Federal employees. In recent 
years, postal workers have repeatedly stood on the front line 
of homeland security. When hired, they must submit to 
background checks and fingerprinting, and they are administered 
a Federal oath of office. It would be an insult to their 
courage and dedication to suggest that they should be afforded 
anything less than Federal status. Health benefits, whether for 
active workers and their families, or people injured on the 
job, or retirees and their families, are very powerful and 
emotional issues. It would be a callous act to reduce the 
health benefits of postal workers injured by anthrax, to reduce 
their injury compensation benefits, or to reduce the benefits 
of the widows of the workers killed by anthrax.
    The administration also has endorsed the principle of 
transparency, ``Ensure that the important factual information 
on the Postal Service's product cost and performance is 
accurately measured and made available to the public in a 
timely manner.'' In a democracy, government agencies have a 
fundamental obligation to function with the consent of the 
government, which could only be achieved through the public 
sharing of information. However, transparency cannot be used to 
place the Postal Service at a competitive disadvantage. Postal 
competitors must not be permitted to use transparency as a 
means of competing unfairly or unduly influencing decisions 
that are central to a healthy and effective Postal Service.
    The third principle endorsed by the administration is 
flexibility, ``Ensure that the Postal Service's governing body 
and management have the authority to reduce costs, set rates 
and adjust key aspects of its business in order to meet its 
obligations to customers in a dynamic marketplace.'' We believe 
that barriers that prevent the Postal Service from adjusting to 
the marketplace should be reviewed and adjusted accordingly. To 
permit the Postal Service to grow in the future, we support 
flexible rate setting, giving postal management the authority 
to design and introduce new products and freedom to borrow, 
invest, and retain earnings. In the area of work force 
flexibility, however, we urge Congress to be extremely careful 
about imposing its judgment on postal management and the 
unions.
    The fourth principle is accountability, ``Ensure that a 
Postal Service operating with greater flexibility has 
appropriate independent oversight to protect consumer welfare 
and universal mail service.'' No one will quarrel with the 
suggestion that there should be an appropriate independent 
oversight of the Postal Service. We expect that there will be 
many disagreements, however, over what type of oversight is 
appropriate. We have serious reservations about the creation of 
a postal regulatory board with broader power than the present 
rate commission. In our view the Board of Governors should be 
strengthened and made more effective in its management 
oversight, and importantly, the consumer advocate should be 
afforded appropriate independence. If rate-setting is made more 
flexible, as we think it must be, certainly there must be an 
appropriate watchdog agency where interested parties can take 
complaints about alleged abuse or violations of the law. 
Employees are and have always been held accountable for their 
actions.
    The fifth principle is self-financing, ``Ensure that a 
Postal Service operating with greater flexibility is 
financially self-sufficient, covering all its obligations.'' 
For the past 33 years, the Postal Service has been a powerful 
financial engine that has more than sustained itself through 
times of enormous growth and change. During the 1980's and 
early 1990's, Congress imposed billions of dollars of cost on 
the Postal Service that had no relation to its operations. This 
cannot be repeated.
    We are informed that the Office of Personnel Management is 
now seeking to impose an $86 billion liability on the Postal 
Service for retirement benefits for workers with Federal 
service credits. This act is inconsistent with the 
administration's statement of broad support for postal reform. 
The same can be said of seeking to shift the cost of military 
retirees or forcing the Postal Service to escrow the funds it 
has overpaid to the CSRS fund. Using the Postal Service as a 
cash cow to help reduce the Federal deficit is a luxury the 
American ratepayer can no longer afford.
    This brings me to what I consider a most important point 
for the Congress to understand about Postal Service financial 
self-sufficiency. The Postal Service is currently giving away 
hundreds of millions of dollars every year in the form of 
excessive worksharing discounts. Postal data show that 
discounts provided to major mailers exceed the cost avoided by 
the Postal Service. It is not possible to create a business 
model for a healthy Postal Service if the rate-setting process 
continues to hemorrhage hundreds of millions of dollars a year.
    There are a number of discounts that should be reduced to 
bring them into line with costs avoided. These include: First 
class non-automation pre-sort discounts; standard A three to 
five digit pre-sort discount; standard A automation discounts; 
and first class automation discounts.
    This problem was tacitly acknowledged by the Presidential 
Commission in its recommendation that all future discounts be 
limited to the costs avoided. That is simply not good enough. 
That horse has left the barn and we need to get it back to 
preserve universal service in the public interest.
    Some interested parties, when confronted with the fact that 
discounts cannot be justified, have responded by calling for 
bottom up pricing. This radical concept, which purports to 
establish a system whereby mailers pay only for the service 
they use, would actually relieve the largest mailers of any 
responsibility for the cost of maintaining a universal system. 
It would almost certainly result in surcharges for services to 
rural communities and low volume post offices. Such a structure 
would be tantamount to proposing that public education be 
funded only by those who have children in school.
    In conclusion, the American Postal Workers Union supports 
the broad principles of the administration, but we reserve our 
position on the details. We also wish to emphasize the 
importance of addressing the most immediate concerns. For long 
term financial solvency, the Postal Service must be relieved of 
the burden of paying for military retirement and must be 
permitted to make appropriate use of the savings from the 
recalculation of its CSRS contributions. In addition, OPM's 
effort to shift Federal service retirement costs to the Postal 
Service must be addressed. This adds up to $27 billion for 
military retirees, $10 billion for the escrow account, and $86 
billion in the Federal service retirement costs. In applying 
the principles supported by the administration we trust that 
these issues will receive favorable consideration. Because if 
the objective is to stabilize the Postal Service and secure its 
future this is where the process must begin.
    Thank you, Mr. Chairman, and thank you once again for the 
opportunity to present testimony today, and I will be pleased 
to answer questions after my colleagues have their opportunity 
to make their remarks.
    Mr. McHugh. Thank you, President Burrus, appreciate your 
insights and your thoughts.
    Next, Mr. William Young who is president of the National 
Association of Letter Carriers. Bill.
    [The prepared statement of Mr. Burrus follows:]

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    Mr. Young. On behalf of the 300,000 active and retired city 
letter carriers across the Nation, thank you for this 
opportunity to share our views on the crucial issue of postal 
reform. NALC is the exclusive collective bargaining 
representative of approximately 220,000 letter carriers who 
work every day in every State and territory of the Nation. City 
letter carriers have a tremendous stake in the future of the 
Postal Service. For them postal reform is not simply a policy 
matter or even a political issue, it is a matter of great 
personal importance for themselves and their families. So I 
wish to thank Chairman Tom Davis, panel Chairman John McHugh, 
Congressman Henry Waxman, Congressman Danny Davis and all the 
members of the Special Panel on Postal Reform and Oversight for 
taking up once again this vitally important issue.
    Over the past decade, my union has been urging Congress to 
pursue comprehensive postal reform. We have long recognized the 
need for a new business model for the Postal Service in the age 
of the Internet. Until recently the debate on postal reform has 
been largely confined to the House of Representatives. Progress 
has been slow, but thanks to your hard work and perseverance, 
both the White House and the Senate are now fully engaged on 
postal reform. As you know, the Bush administration recently 
issued a set of general principles for postal legislation. We 
support these principles and look forward to working with the 
leaders of both houses of Congress to achieve bipartisan postal 
reform in 2004.
    Today, I would like to briefly address the big picture of 
postal reform before turning to the key work force issues that 
are the main topic of this panel's testimony. NALC believes 
that the Postal Service's unmatched ability to reach every 
household and business in America 6 days a week is a vital part 
of the Nation's infrastructure that is essential to the 
economic health of the United States. As such, it is important 
to take steps now to strengthen its ability to function in the 
face of tremendous technological change. We urge Congress to 
reject a feared downsizing strategy and to embrace an 
empowerment strategy for the Postal Service. The Postal Service 
should be given the commercial freedom it needs to maximize the 
value of the universal service network by adding services and 
working with its customers to find new uses of the mail to 
replace those uses that are now migrating to electronic 
alternatives.
    Greater commercial freedom which involves flexibility over 
prices and the ability to strike partnerships to optimize the 
value of its network would allow the Postal Service to maximize 
revenues and control costs while retaining the value of 
universal service. We recognize this approach poses the 
difficult challenge of balancing commercial concerns and public 
service considerations. We believe it is possible to give the 
Postal Service the flexibility it needs while protecting the 
legitimate concerns of competitors, customers and the public at 
large.
    Let me now turn to the main topic of this hearing, postal 
work force issues. Our starting point is pretty simple, 
collective bargaining is a fundamental right of all, and the 
Postal Reorganization Act of 1970 rightly established 
collective bargaining under the auspices of the NLRB. I would 
like to make a couple of general observations before suggesting 
some guiding principles on work force reform.
    First, I would like to point out that collective bargaining 
in the Postal Service has been a resounding success. Since the 
Postal Reorganization Act was enacted, there has not been a 
single work stoppage or disruption in service as a result of 
labor relations. Given the fact that the Postal Reorganization 
Act was enacted in part at least as a result of a national 
postal strike in 1970, this 34 year record of peaceful labor 
relations should not be minimized. The fact is that collective 
bargaining has been a win-win-win proposition. Postal workers 
have achieved decent pay imperatives, taxpayers have saved 
billions through the elimination of direct and indirect 
taxpayer subsidies, and the mailers have enjoyed affordable 
postal rates.
    Second, it is important to note that neither the postal 
unions nor postal management favor radical changes to the 
existing postal collective bargaining system. Given that all 
sides agree that mail delivery is an essential public service 
that should not be disrupted by lockout or strikes, a workable 
system for resolving collective bargaining impasses is 
essential. NALC believes the existing system of interest 
arbitration has worked extremely well.
    Third, it is important to note that postal labor relations 
have improved dramatically in recent years. Three of the four 
unions now have labor contracts in place that were voluntarily 
negotiated. All four have made progress in reducing the number 
of workplace grievances using various mechanisms. These 
improvements occurred not because Congress or the GAO or any 
other outside party mandated them. They happened because the 
parties themselves worked very hard to find common ground and 
to seek ways to resolve mutual problems. Postmaster General 
Jack Potter and his team deserve credit for working with us to 
achieve this transformation. With these general points in mind, 
NALC urges you to abide by four principles when you consider 
reform of the collective bargaining system.
    One, I urge you to follow the Hippocratic Oath: ``First do 
no harm.'' The system we have is not perfect. Indeed no system 
is perfect. But the parties have learned to work with each 
other within the current framework. As I outlined above, the 
process has worked well for all concerned. At a time of great 
change for the Postal Service in other areas, labor stability 
is crucial.
    Two, maintain the flexibility that is currently built into 
the law. The PRA contains specific but flexible timetables for 
negotiating contracts and resolving collective bargaining 
impasses. It also provides a menu of options for impasse 
resolution and gives the parties the flexibility to shape these 
options for use, when appropriate, as conditions change. 
Indeed, the unions at this table have at various times used 
mediation, fact finding, mediation-arbitration, mediation-fact 
finding in combination, and last best offer arbitration. In the 
face of constant change, the flexibility of the current law is 
a virtue.
    Three, avoid politicizing the collective bargaining 
process. Congress or White House intervention in the process 
would be highly destructive. This would inevitably happen if a 
politically appointed regulatory board were injected into the 
negotiations process.
    Four, avoid exposing the process to outside litigation. 
Subjecting the results of collective bargaining to litigation 
before a Postal Regulatory Board, as proposed by the 
President's Commission, would be disastrous to the process. 
Depending on the prevailing political winds of the day and the 
makeup of the regulatory board at any particular moment, either 
side might be tempted to try to obtain from regulators what 
they could not expect to achieve through good faith bargaining.
    Finally, I wish to address a couple of specific issues that 
have arisen in the wake of the report of the President's 
Commission on the Postal Service--the direct negotiation of 
pension and health benefits, and changes to the system of 
interest arbitration. As you know, as employees of the Federal 
Government, postal employees are covered by one of two pension 
plans, and also allowed in the Federal Employees Health 
Benefits Program. Although eligibility for participation in 
these programs is automatic and is not subject to collective 
bargaining, it is important that you understand that the cost 
of such benefits figures very prominently in postal labor 
negotiations. In the area of health benefits, postal management 
and its unions already directly negotiate the share of premiums 
to be paid by workers and the Postal Service. And when it comes 
to negotiating wage increases, the rising cost of pensions is 
explicitly discussed by the parties. The so-called ``roll up 
factor'' for employee fringe benefits, the added cost of 
benefits when postal wages are increased, is never far from the 
negotiators' minds. And you can be sure that no interest 
arbitration panel employed over the past 20 years has been 
spared the evidence from both sides on the cost of health and 
pension benefits.
    My point is this: Although the parties do not directly 
negotiate over all aspects of postal benefit costs, these costs 
are not ignored and they invariably affect the results of wage 
negotiations. Indeed, a close examination of postal wage trends 
over the last 25 years reveals that postal wages have increased 
nearly 15 percent less than wages in the private sector as 
measured by the Employment Cost Index. This wage restraint is a 
direct reflection of the effort of negotiators and interest 
arbitrators to restrain wage costs in the face of rising health 
and pension costs to the USPS, a trend, which you all know 
affects all American employers. Given this context, we do not 
believe that it is necessary to formally place health and 
pension programs on the collective bargaining table. The 
parties already effectively take these costs into account under 
the existing system.
    Let me turn to one other work force topic raised by the 
President's Commission. That would be reform of the postal 
interest arbitration process. We believe these changes are 
unnecessary and counter-productive for a couple of very 
practical reasons. First, the Commission's proposal would 
discard 30 years of experience by the parties and require us to 
start all over again, under a radically different process. That 
is a prospect that would inevitably impose significant cost on 
both sides. Second, we believe the only workable changes to the 
system of collective bargaining must be developed and 
negotiated by the parties themselves, not externally legislated 
or mandated. Both parties must see this process as their 
process for the results to be legitimate. The existing system 
gives us the flexibility to share the dispute resolution 
process without outside intervention.
    Allow me to add one last note on interest arbitration. We 
believe the existing dispute resolution system is fair and an 
acceptable alternative to the right to strike. I say this not 
because we always prevail when we go to interest arbitration; 
indeed, on more than one occasion we have lost. In the 1990's, 
an interest arbitration panel chaired by Richard Mittenthal 
adopted a USPS proposal to create a lower-paid temporary work 
force to handle the transition to full automation, and another 
panel chaired by Rolf Valtin increased the employees' share of 
health benefit premiums. I say it because, win or lose, my 
members know that the existing system gives us a fair shot on 
the merits, and therefore they accept the results as 
legitimate.
    I want to conclude my testimony by repeating something I 
told the members of the President's Commission at its first 
public hearing in February 2003. Good labor relations must be 
built on trust and good faith between the parties. No amount of 
tinkering with the mechanics of the collective bargaining 
process will change that basic fact. At this moment of great 
challenges for the Postal Service, we have worked very hard 
with the Postmaster General to build trust between us and to 
improve the workplace culture in the Postal Service. Please 
tread lightly in these areas so as not to risk the progress we 
have made.
    I offer the committee the full cooperation of the men and 
women who deliver the Nation's mail every day. Working together 
we can ensure that every American household and business will 
continue to enjoy the best postal service in the world for 
decades to come. Thank you very much.
    Mr. McHugh. Thank you, President Young, and we all share 
that objective, and that is why we are all collectively here 
today. I appreciate your comments.
    Next, Mr. Dale Holton, President of the National Rural 
Letter Carriers Association, Dale.
    [The prepared statement of Mr. Young follows:]

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    Mr. Holton. My name is Dale Holton, I am president of the 
103,000 member National Rural Letter Carriers' Association. I 
too would like to thank the panel for the opportunity to be 
here to testify before you today.
    Rural letter carriers deliver mail on 70,000 routes, drive 
3 million miles a day, serve 32 million families and 
businesses. Our members are also known nationwide as a post 
office on wheels. The reason for that is we offer our customers 
all the services performed over the counter at a post office. 
We sell stamps, money orders, express and priority mail, 
delivery confirmation, certified or other accountable, and we 
accept parcels to be mailed. Rural letter carriers deliver on 
average 2,875 pieces of mail a day on each route. And this 
total includes approximately 200 parcels a week, a higher 
number than you would find on some city routes because of where 
we deliver. It is also because of the buying habits of our 
customers and the fact that, unlike our competitors, we have no 
surcharge for rural delivery.
    The United States is unique in the world with regards to 
mail. We handle 46 percent of the world's mail. Americans do 
more financial transactions through the mail than any other 
nation in the world. Only 22 percent of Americans receive or 
pay any portion of their bills electronically. Yet, under 
current circumstances, the Postal Service business model will 
fail. There must be legislative changes to protect the U.S. 
Postal Service that Americans have come to count on and trust.
    These opinions were confirmed by the poll conducted by the 
Presidential Commission. The antiquated rate-setting process 
needs to be revamped or replaced. Our competitor, electronic 
communication, goes around the world instantaneously. In order 
to remain competitive, the U.S. Postal Service needs the 
flexibility of being able to adjust rates as quickly as our 
competition. The ``break-even'' and ``no retained earnings'' 
provisions in the current business model that governs the 
Postal Service are years beyond their usefulness. Let us work 
with the business mail community and grow the U.S. mail volume 
with increased negotiated service agreements and intelligent 
mail.
    The collective bargaining provisions of the current law 
have served their purpose well. As my colleagues said earlier, 
the U.S. Postal Service has had no labor disruption in over 30 
years, unlike our counterparts in other nations. When 
bargaining becomes deadlocked, binding arbitration resolves the 
dispute. The current statute provides great flexibility for the 
bargaining parties to shape the process in a variety of ways. 
The Presidential Commission recommended mandating certain 
procedures rather than opting to utilize processes suited for 
the circumstances. We believe the flexibility of having options 
is vastly preferable. However, let me make one thing absolutely 
clear. Utilizing binding arbitration does not guarantee your 
side will prevail.
    In our most recent bargaining, the Postal Service and the 
Rural Letter Carriers' went to binding arbitration. We tried 
the proposed route where we chose one arbitrator to go through 
the whole process with us and at the end, through binding 
arbitration, the Postal Service won and they won big. The 
average rural carrier lost 3.1 hours of productivity gains 
granted to the Postal Service per week. That translated to an 
average loss for each carrier of $4,600 per year. It was offset 
only slightly by $2,600 in arbitrator-granted raises. The 
savings to the Postal Service, by their own figures, was 
approximately 12 million less paid hours annually due to this 
arbitration award. The award's savings to the Postal Service in 
rural carrier compensation amounts to $312 million annually.
    I want to say that we appreciate the Presidential 
Commission's work and we welcome the active involvement of the 
White House and the Department of the Treasury. We believe 
their participation has expanded the interest in postal reform 
in Congress and in the mailing community. The National Rural 
Letter Carriers' Association has been at the forefront of 
attempts to enact meaningful postal reform legislation, and has 
publicly endorsed such legislation when it was introduced in 
the last three Congresses. We believe mail to be an important 
continuing government function. And one of the basic strengths 
of the U.S. Postal Service is our collection and delivery to 
everyone, everywhere, every day.
    Chairman McHugh and Congressman Davis, we are today on a 
path toward enactment of postal reform legislation, primarily 
because of your Herculean efforts to update, educate, 
illuminate, and enact a new law for our mail community. You 
have our sincerest gratitude for your intellect and fortitude.
    And this concludes my testimony, and I would be pleased to 
answer questions.
    Mr. McHugh. Thank you very much, President Holton.
    As they say, last but not least, John Hegarty, national 
president of the National Postal Mail Handlers Union. John, 
thanks for being here.
    [The prepared statement of Mr. Holton follows:]

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    Mr. Hegarty. Good afternoon, and thank you Chairman McHugh 
and members of the committee for this opportunity to testify. 
My name is John Hegarty and I am the president of the National 
Postal Mail Handlers Union, which serves as the exclusive 
bargaining representative for 57,000 mail handlers nationwide.
    The Mail Handlers Union hopes to remain an active 
participant in the process of postal reform. The recently 
released White House principles show that the White House has 
considerable confidence in the expertise and legislative 
initiative----
    [Public announcement interruption.]
    Mr. Hegarty. Let me continue. The recently released White 
House principles show that the White House has considerable 
confidence in the expertise and legislative initiative of your 
committee and that of your Senate counterparts. I would like to 
congratulate you, Chairman McHugh and Representatives Danny 
Davis, Henry Waxman, and Tom Davis, and all others who have 
provided leadership on this issue.
    I would like to take a few moments to comment on the last 
terrorist act against homeland security affecting both Congress 
and the U.S. Postal Service, and of course I am talking about 
the poison ricin, which was found in Senator Frist's mailroom 
on Monday. A similar powder spill incident in Wallingford, CT, 
has thankfully tested out negative for both ricin and anthrax.
    It is perhaps ironic that the ricin incident occurred on 
the evening before we were scheduled to testify before the 
Senate Committee on Governmental Affairs on the future of the 
Postal Service and its employees. The advance NPMHU written 
testimony raised the danger of substances such as anthrax and 
ricin and noted why mail handlers are so crucial to the safety 
and security of our country. That hearing obviously has been 
postponed as the need for safety and security goes on.
    As a mail handler from a large processing plant in 
Springfield, MA, let me briefly explain how these types of 
terrorist threats could attack mail handlers and indeed all 
craft employees. Mail handlers are generally the first to 
handle mail when it enters a processing plant. Raw or 
unprocessed mail, which could be letter-sized envelopes or 
larger, flat-sized envelopes, packages, or parcels are dumped, 
typically on a conveyer belt-type of a system and worked--or 
culled and sorted--by mail handlers. Letters and flats are run 
through a cancellation machine to cancel the stamps and are 
then forwarded to other mail processing machinery throughout 
the building which is typically manned by either mail handlers 
or clerks. After all the processing is completed, mail handlers 
load the processed mail onto outbound transportation. As you 
can see, this is a labor-intensive, hands-on type of mail 
processing. Mail handlers and all craft employees therefore are 
on the front lines when it comes to possible exposure to 
biological agents or other terrorist threats through the mail.
    As always, the safety of mail handlers and other postal 
employees is the first concern of the National Postal Mail 
Handlers Union. We are working with the Postal Service through 
the Task Force on Mail Security on these dangerous incidents. 
We appreciate the funding that Congress has already 
appropriated for bio-protection systems to keep our employees 
safe and we look forward to working with Congress on those 
issues in the future.
    The Mail Handlers Union appreciates the swiftness of your 
reaction to the CSRS funding problems and the financial strain 
caused by the deadly anthrax attacks. Similar financial issues 
remain, however, and congressional resolution of both the 
escrow issue and the military service issue are of immediate 
and paramount importance to the financial future of the Postal 
Service. Not releasing the postal escrow account or forcing the 
Postal Service to pick up more than $27 billion in military 
costs that no other Federal agency has to pay certainly will 
result in a severe crisis in the Postal Service and, 
ultimately, a hike in postage and cost to all ratepayers.
    As I noted, the White House provided broad guidelines in 
terms of postal reform. We believe the Postal Service needs the 
tools to be more competitive. In accordance with those 
guidelines, those tools could include price flexibility and a 
ratemaking structure that, as the White House indicated, is 
more similar to generally accepted business models. For 
example, we are experiencing yet another spike in fuel costs 
and, once again, the Postal Service is not structurally set up 
to respond quickly to the problem. It is difficult to run in a 
businesslike fashion when common business practices are not an 
available option.
    My union, therefore, counts itself in strong support of 
legislative change that would grant the Postal Service 
additional flexibility in pricing, additional flexibility in 
borrowing and the design of postal products. Such changes must 
allow the Postal Service to establish postal rates that remain 
affordable, both to the major business mailers and the American 
consumer, while providing sufficient revenue to protect and 
support the infrastructure that universal service requires and 
to provide postal employees with a decent and fair standard of 
living.
    I do have considerable expertise in the area of the 
President's Commission in work force issues. I believe that the 
term ``best practices'' can be applied to the Postal Service's 
labor relations. In general our collective bargaining process 
is seen by others as a model of flexibility and labor peace. In 
recent years, moreover, all parties have been working on these 
matters diligently and our efforts have resulted in dramatic 
changes.
    The Mail Handlers Union strongly endorses the current 
process for collective bargaining under the Postal 
Reorganization Act. Our current national agreement covers the 
period from November 2000 through November 2006. Although it 
originally was scheduled to terminate later this year, we 
recently reached an agreement on a 2-year extension to the 
contract that was overwhelmingly ratified by our members. Nor 
is productive collective bargaining a recent phenomenon.
    Since the PRA was enacted in 1970, we have engaged in 13 
rounds of full collective bargaining with the Postal Service, 8 
of which, including the last 3, have resulted in voluntary 
agreements that were endorsed by postal management and ratified 
by the union membership. The other five were resolved through 
arbitration with the results willingly accepted by both 
parties. On at least three of the five occasions when the 
parties used arbitration, however, the parties actually settled 
most open issues and only arbitrated one or two issues that 
could not be resolved without an arbitrator's decision. Even 
when arbitration does occur, there are no guarantees. For 
example, arbitration in the 1984 round of bargaining created a 
lower entry rate for new mail handlers, and an arbitration in 
the 1990 round produced a 3-year contract without any general 
wage increases for mail handlers. Because both parties accept 
the process, however, even these clear management victories 
were implemented peacefully.
    The key advantage of the current bargaining process is its 
flexibility, which coincidentally is one of the 
administration's principles. Under the current statute, the 
parties to any bargaining dispute are allowed to devise their 
own procedural system for resolving their dispute. Thus, under 
the PRA fact-finding followed by arbitration is the default 
position, but the parties in prior years have used fact-
finding, mediation, arbitration, and multiple combinations of 
these processes to resolve their disputes. If the procedural 
changes recommended by the Presidential Commission were 
adopted, this flexibility would be eliminated and instead the 
parties would be constrained by rigid procedures that, in our 
view, would not improve the bargaining process one iota.
    The Commission said that a core ingredient of its revised 
procedure is the mediation-arbitration approach to resolving 
bargaining impasses. Under a ``med-arb'' approach, the fact-
finding phase now set forth in the PRA would be replaced with a 
mandatory mediation phase of 30 days, and if mediation were 
unsuccessful, the appointed mediator would become one of the 
final arbitrators. We believe, however, that requiring this 
``med-arb'' approach would be counter-productive to the 
successful resolution of many bargaining disputes. The 
flexibility now part and parcel of the PRA permits the use of 
``med-arb'' and it has been utilized in prior rounds of 
bargaining when the parties deemed it advisable.
    Also, part of the President's Commission recommendation is 
a proposal that would replace the parties' current practice, 
which uses a three-member arbitration panel, in which each 
party chooses one arbitrator and then the parties jointly 
select one neutral arbitrator, with three outside arbitrators. 
In our view this change would have extremely negative 
consequence for the arbitration process, as it would completely 
remove the parties' respective representatives and their unique 
expertise from the decisionmaking process.
    The Commission also has recommended that after the 
arbitration decision is issued the parties have 10 days to 
review the decision and possibly bargain changes agreeable to 
both union and management. This proposal would be completely 
unnecessary if the current process allowing for each party to 
have a representative involved in the arbitration decision were 
made or maintained. It also poses problems for most unions, 
like the mail handlers, that require membership ratification 
for any bargaining agreement.
    The Commission has also recommended that binding 
arbitration be required to use the ``last best final offer'' 
model, in which each party is required to submit a total 
package of proposals and the arbitration panel is required to 
choose one or the other package and cannot compromise between 
the two. In theory, this would place extraordinary pressures on 
both sides to produce reasonable comprises. Sometimes this 
model of arbitration would be helpful, but other rounds of 
bargaining would not be helped by requiring ``last best final 
offers.'' The current statute allows for ``last best final 
offer,'' and it has been used in certain bargaining. The 
flexibility built into the current system is essential and 
should be maintained.
    Frankly, I believe the Nation is better off with bargaining 
and binding interest arbitration under the PRA than with those 
other models. The testimony before the Presidential Commission 
from postal management and the postal unions and even from a 
panel of highly respected neutral arbitrators was consistent: 
that the current collective bargaining process is working well. 
For 33 years the parties have avoided labor strife and economic 
warfare that often characterize private sector labor-management 
relations. Arbitrators and participants all agree that the 
process has improved dramatically over the years and may be a 
model for other labor-management negotiations. There is, in 
short, no reason whatsoever to amend the statutory provisions 
governing collective bargaining or to otherwise adopt 
provisions that would allow outside entities to interfere in 
the bargaining process.
    The Presidential Commission also has proposed bargaining 
over health insurance, pensions and other benefit programs. In 
fact, the current employee contribution rates for health 
insurance already are bargained, and the health benefits 
themselves established through the Federal Employees Health 
Benefit Act are universally acknowledged to be well maintained 
and well negotiated by the Office of Personal Management. The 
Mail Handlers Union happens to be the sponsor of one of the 
largest Federal health plans, and I can assure you that if the 
Postal Service ever were to withdraw from the Federal employees 
health system, chaos would be the result. As for pension 
benefits, with the passage last year of the ``CSRS fix'' 
legislation, all pension benefits for postal employees are now 
fully funded. The recommendation on bargaining benefits, 
therefore, is clearly aimed at guaranteed health insurance for 
postal retirees. We see absolutely no reason why promises of 
lifetime health insurance to postal employees should be the 
subject of bargaining, especially when the Federal Government 
provides these benefits to Federal employees through 
legislation and many other large employers provide similar 
benefits. In any event, recent proposals from postal management 
would allow the Postal Service to ensure funding of these 
retiree health costs by using the escrow account now available 
because of pension over-funding. That is an appropriate use for 
those funds and should be part of any postal reform.
    Thank you for allowing me to testify and I would be happy 
to answer any questions.
    [The prepared statement of Mr. Hegarty follows:]

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    Mr. McHugh. Thank you very much, President Hegarty.
    Gentlemen, as I have said, we deeply appreciate you being 
here today. This is, as Yogi Berra said, ``deja vu all over 
again'' for many of us. We have had private meetings, we have 
had previous hearings that your organizations have been 
represented at, and I do not want to beat the proverbial dead 
horse. Also, I would add that your statements are very, very 
comprehensive in your analysis of the challenges, your analysis 
of particularly, as we asked you to do, the President's 
Commission recommendations and findings.
    What I would like to hear, because Congress sometimes has 
trouble walking and chewing gum at the same time. We cannot 
have too many balls in the air, and while I do not for a moment 
minimize the incredible breadth----
    [Public announcement interruption.]
    Mr. McHugh. But in any event we have an excellent profile 
of the concerns of the issues that you deem important, but if 
you had to individually name for us the one or two issues that 
you feel a postal reform bill must include, in other words, 
without those particular components, it is useless, what do you 
tell us would have to be in such a bill? And I will start with 
Bill Burrus.
    Mr. Burrus. I think it is absolutely essential in 
addressing the future needs of the Postal Service, if reform 
means putting the Postal Service in a position, financial 
position to provide universal service to the American public 
far into the future, I think the absolutely essential issues 
that must be resolved are those that sap the financial 
resources of the Postal Service. During my testimony I listed 
three that add up to some $123 billion of cost to be imposed on 
the Postal Service. I am not aware of any other modification 
that is under consideration or that is on the radar screen 
within the realm of possibility that would generate one fifth 
of that obligation that is being imposed upon the Postal 
Service, through the escrow and the CSRS and the prior Federal 
service. And on top of that is the interest in requiring that 
the Postal Service fund their health care for their retirees. 
If you add that on top of the $120 billion, you are talking 
about now almost $180 billion of financial obligation of the 
Postal Service during a period where there are those who say 
the Postal Service is in a death spiral, it will be ill-
equipped to fund.
    So, I do not know of any other--we went through a period in 
the 1980's where reform of the Postal Service was changing the 
logo; we reinvented the postal logo, changed the colors of the 
Postal Service, did the mail boxes and all the trucks under the 
umbrella of reform. I think fundamental to the Postal Service 
and its ability to exist in the future is money and almost $200 
billion in costs. If you do flexible rate setting, it is not 
going to generate $200 billion. If you permit us to compete 
with UPS and FedEx, compete in other markets out there, there 
is no possibility you are going to get anywhere near $200 
billion.
    So, if I were to select a single issue I think stands 
alone, I do not think there is even a close second that one has 
to address the three main issues and somehow address the health 
care for retirees, because it is going to continue to surface 
over the years. So that $200 billion has to be addressed. I 
think anything else while we are seeking and achieving reform, 
I think we are whistling into the wind.
    Mr. McHugh. Thank you, sir. President Young.
    Mr. Young. From my perspective the most important element 
is the perseverance of universal service. That to me is the 
linchpin of the whole organization. If we do not have that, I 
think everything else tumbles behind it.
    The second most important thing to me would be to work on 
the business model. Thirty years ago, when the Postal 
Reorganization Act was enacted, we did not have computers, e-
mails and things like that were just distant dreams. We have to 
change the structure of the way the Postal Service is allowed 
to operate so that they can be competitive in the Internet age.
    So those are my two issues, and I think those are the 
essential points. Of course, I am very concerned about 
collective bargaining, but that would be a definite element of 
the second issue that I raised. But the key one, the most 
important one above all, is perseverance of universal service.
    Mr. McHugh. Thank you, sir.
    Mr. Holton. And I agree wholly with the universal service 
at an affordable price for everybody, but in order to maintain 
that I also believe that you have to do something with the 
business model in the form of pricing flexibility to allow the 
Postal Service to have a little bit better way of trying to 
establish prices as they need to, rather than waiting 18 months 
after they determine they need a rate increase. And then 18 
months later, they finally get it, only to find out that fuel 
costs have gone up and other expenses have gone up to where now 
they have to ask for another one. So I would say universal 
service and improving the model through pricing flexibility are 
the main things at an affordable cost.
    Mr. McHugh. Thank you, sir. Mr. Hegarty.
    Mr. Hegarty. I agree with my colleagues. I also feel the 
escrow account and the military retirement money is very 
important to the survival of the Postal Service. But I would 
also like to say one thing that should not be done through 
postal reform, and that is to change the collective bargaining 
along the lines of what the Presidential Commission is 
recommending. And I am sure you have seen it in all of our 
testimony.
    You have 750,000 dedicated career craft employees, 
management employees, we work weekends, we work nights, we work 
24 hours a day, 7 days a week. And I think cutting postal 
employees' pay and benefits or subjecting our current 
collective bargaining system to the draconian changes that have 
been recommended, could have a drastic effect on the morale and 
wellbeing of all of our employees. And I think that is the 
essence of the organization--the dedication of these front line 
employees that do the work day in and day out.
    Mr. McHugh. Thank you, gentlemen. Mr. Davis.
    Mr. Davis. Thank you very much, Mr. Chairman.
    Gentlemen, let me thank you for your testimony. Oftentimes, 
when we talk about finding economies of scale and when we talk 
about finding the most efficient and effective way of providing 
a service or producing a product, we hear about downsizing, 
outsourcing and privatizing, especially as that has been 
related to anything connected with government. What impact do 
you think these concepts would have on restructuring the Postal 
Service and on the memberships that you represent?
    Mr. Burrus. I have enjoyed a 50-year career as a postal 
employee and throughout that period the Postal Service has 
always been in a period of flux of people. There is no real 
security in postal jobs except against layoff. Employees 
currently in the city of Chicago, some 200, 300 or 400 
employees are facing the possibility of being reassigned 
outside of their work location, the office in which they have 
spent all of their working lives. So that is a part of postal 
employment. It is something we do not like but it is part of 
postal employment. We have attached that protection against 
layoff, but within those very broad parameters, employees are 
reassigned from post to post.
    In this discussion of reform the Commission made the 
recommendation of applying an economic model to rural post 
offices. If they were not self sufficient, there would be 
authority to close them, based upon economic issues. Plus, 
applying a BRAC model to the consolidation of plants. As a 
service agency, I think that the Postal Service's fundamental 
obligation is to the American public and that on occasion it is 
at odds with making a profit in a specific location. So for the 
job protection of the employees and for the continuation of 
universal service at universal cost to all Americans, we 
believe there should be some stability; in those very broad 
parameters, there has to be some stability.
    Now we are entering an age in our society where workers' 
changing jobs 20, 30, 40 times is expected during their working 
life. I guess you could apply that to postal employees where 
they are not really changing jobs, they are just changing work 
locations, but individually it causes a lot of unrest, and a 
lot of uncertainty, and a lot dislocation for the employees. So 
we would hope that whatever this new business model--and we use 
all these cliches to describe the future--reform, business 
model--what are we going to do? Let us put on the table what it 
is we are going to do, and I am saying there should be some 
continuation of service to the American public at reasonable 
cost without paying greater concern for the interests of the 
major areas of the country.
    Mr. Davis. Mr. Young.
    Mr. Young. Congressman Davis, as the committee wrestles 
with the issues of postal reform, I hope there comes a time 
when things other than finances are examined. I do not like to 
politicize a tragedy, but there has been some conversation 
around the table, you all have been victimized by it yourself, 
by bio-terrorism and the results of bio-terrorism. And when I 
testified before the Commission I reminded them, ``just think 
what would happen if we had a fragmented or privatized Postal 
Service with 60 or 70 companies involved in the mix.'' How 
would we ever contain that as quickly and as well as we did, 
notwithstanding the fact that it took the lives of two of 
Bill's members? So, it was not quick enough.
    I just think that you have to decide as a public policy 
matter, what role you want the Postal Service to play, and more 
importantly what role do you want the postal employees to play. 
Then it comes down to balancing that with the needs of the 
business community, the mailers, and the people that are 
footing the bill for the cost of the Postal Service. And I hope 
that this committee looks really carefully at the Commission's 
recommendations because I am very concerned about giving too 
much authority to an independent regulator who would not be 
responsible to any of you, in the area that I will just coin as 
public policy arena. Why let an independent regulatory body 
determine what constitutes universal service, when you all are 
the ones that are going to hear the complaints from it? If they 
cut service off in Chicago, they are not going to go to the 
independent regulator to complain, they are going to come to 
you. So I would think if I were a Congressman, I would want to 
keep some control of that, so I could be responsible to the 
people that I represent.
    And I just hope as we get through this--it seems like 
everybody focuses, and I understand this, on the finances, 
because right now we are in financial trouble. And I am not 
saying you do not need to focus on that, I am saying I hope and 
I pray that does not become the sole focus of postal reform. 
There is a lot more needed than just what financially would put 
us in a better position, in my perspective.
    Mr. Holton. And when you talk about universal service, if 
you talk about the service that my members provide, we are 
usually the last mile of the way, when it comes to delivering 
the Postal Service, and we serve a lot of customers in rural 
America who, if you change the Postal Service too much--and I 
think you used the word awhile ago--privatization--if 
privatization comes along that is we have to make a dollar and 
we have to satisfy stockholders and shareholders. But if you 
are going to define universal service, it has to include those 
people that live at that last mile of the last rural route, 
wherever it happens to be. And you have to be careful, because 
if you start breaking it apart, those are the people in America 
that are going to be most affected, because where the work gets 
done the most is where it is going to be most profitable. And 
then you are going to have a Postal Service that is fragmented 
and it is not going to provide that universal service.
    So I would hope that we would pay close attention to that 
as we move forward and realize that the Postal Service is one 
of the institutions of America. A study that was done by the 
Presidential Commission itself found it was one of the most 
admired, trusted agencies in the government. They all believe 
that the Postal Service has done a good job as it is. But we 
just have to find ways to make sure that that universal service 
can continue without affecting the price too much.
    Mr. Hegarty. While downsizing is happening now, Congressman 
Davis--I noticed in your opening remarks you said you were 
concerned about excessing, we are concerned about that as 
well--we have a protection built into our collective bargaining 
agreement that when excessing occurs at a location, any 
inconvenience to employees should be cut to a minimum. To that 
end, we have established a task force with the Postal Service 
at the headquarters level to meet on Article 12 issues, whether 
it be moving employees from plant A to plant B, because of a 
consolidation, or whether it be just downsizing a specific 
plant. So we are working with the Postal Service, but it is a 
big concern of the Mail Handler Union. And we do not want 
downsizing and excessing to take place just for the sake of 
change. We want it to be legitimate.
    And it leads me to the Postal Network Optimization 
Commission that the President's Commission recommended, which I 
think is a terrible idea. I think that takes the flexibility 
and the decisionmaking authority away from the Postal Service, 
to make the decisions that they need to make as a business, and 
puts it into somebody's hands who I do not think would 
understand the business. So we are against the PNOC, as it is 
called.
    As far as outsourcing, I think outsourcing, subcontracting, 
whatever you want to call it, has been shown to be a failure 
many times to the Postal Service. A prime example is the Emery 
contract for the processing of priority mail. That contract 
lasted for 4 or 5 years; it was a colossal failure. It cost the 
Postal Service millions of dollars and it showed that postal 
employees process that mail more efficiently and better than a 
private company could, and I believe the Board of Governors' 
Nick McWhorter commented that it was the biggest mistake that 
the Board of Governors ever made, authorizing the outsourcing 
of the priority mail network. We have a similar situation now 
with the mail transport equipment network. It was subcontracted 
and I believe a recent study showed that the figures that was 
based on were incorrect, and that the Postal Service is 
actually losing money on that deal as well.
    As far as privatization outright, having private companies 
performing some of the service, I agree with President Young on 
that. I think it would be a nightmare, to try and track 
packages or letters with a biological or hazardous material in 
them. The other thing is we cannot lose sight that private 
companies are in business to make money. They are not in 
business to provide a service to the American people, and that 
is what the Postal Service does, and we do not want the service 
to suffer.
    Mr. Davis. Thank you very much, gentlemen. Thank you, Mr. 
Chairman.
    Mr. McHugh. I thank the ranking member. Just for the 
record, I want to respond to President Young's comments on 
universal service which, given my district where my largest 
community is 29,000, I kind of have an interest in that. I 
totally agree personally with what you say. I would be willing 
to bet, and we have been talking to Danny Davis and his people 
and the ranking member on the full committee, Henry Waxman, 
that we are going to have for the first time--because as you 
gentlemen know there is no definition of universal service. And 
that concerns me, because I think the inclination in these 
fiscally challenging times would be to define it less than what 
I would like to see, that we have the Postal Service, not an 
independent body, look at it and then come back to us, because 
that should be--I agree, Bill, that should be our prerogative, 
and our responsibility, because you are right, if we lose 
coverage to Pierrepont Manor--and nobody in this room except 
maybe Robert Taub, my chief of staff, knows where that is, and 
that is where I live, with about 214 people--if they lose 
universal service, they are not go anywhere but--they know 
where I live, put it that way. So, that is an important issue, 
and I promised not to editorialize too much any more. With that 
I would be thrilled to yield to my friend and colleague from 
Virginia, Mr. Schrock.
    Mr. Schrock. Thank you, Mr. Chairman.
    As you noticed from some of the testimonies, when they were 
talking about the Members of Congress who have been very 
involved in this, my name was not there. I asked to be on this 
panel, I know it is a big issue, I want to understand it, 
because I have to make the same vote Mr. Davis, Mr. McHugh 
make, and the better I understand it, the better educated I am 
going to be when it comes time to vote. That is why I wanted to 
be here, and listening to your testimonies is very, very 
valuable to me. The more I hear--it is too bad that every 
Member of Congress cannot hear this, because it impacts every 
single constituent of every single Member and I think the more 
they learn, the more they understand, the better they are going 
to be when it comes time to vote on this sometime down the 
pike.
    I have several questions, but I am going to have to narrow 
them down to a couple. I want to start with Mr. Burrus. In your 
testimony, you called the Commission's recommendation to limit 
future worksharing discounts to costs avoided simply not good 
enough. How do you suggest deriving a system to share those 
costs to preserve important customers and yet maintain 
universal service? We are talking about universal service. I 
would be interested to know what your opinion is on that.
    Mr. Burrus. I think the effort to develop a system to 
determine whether or not worksharing discounts exceed or are 
under the costs avoided by the Postal Service, is a task that 
should be best left to the Postal Service and not be considered 
by Congress. All our union seeks is a simple statement that if 
there are to be worksharing discounts, and there will, they 
should not exceed costs avoided. Not to get into these 
specifics of any specific discount but to set the standard, set 
the bar that all future and all past discounts will be measured 
against. That is our objective. Human interaction leads to 
abuses and argument suggests that interaction has led to 
discounts that resulted in the Postal Service subsidizing 
private entities.
    If we perform a service that has a certain value to it, if 
the private sector performs that service they should do it 
cheaper than the Postal Service, or at least at the same cost. 
We have absolute proof and we are willing to slug this out 
before the Rate Commission, or whatever body is set up, to 
prove our case. But we know without any doubt that there are 
great incentives added to those discounts to continue those 
private entities in their business endeavors.
    A large enterprise out there has hundreds of millions of 
dollars invested, and that is all dependent upon the setting of 
the discount. So questions come into play, not only whether or 
not it exceeds the costs avoided, but what the impact of that 
discount would be on that newly established business in the 
private sector. And we think that is becoming very dangerous, 
the payers of those mistakes are the average ratepayer. I took 
to the committee the other day two letters I received at my 
home, both first class. One, the postage paid was 37 cents the 
other was 27 cents. The one for 27 cents was put in the Postal 
Service in Greenville, NC. The one for 37 cents was put in the 
post office in Washington, DC. So, the 27-cent piece had no 
transportation, I mean it had transportation cost attached to 
it, the 37-cent piece had no transportation attached to it. 
Yet, there was a 10 cent difference in the postage paid for two 
first class pieces. And I think those judgments--there should 
be a standard fee applied, a perfectly reasonable standard.
    Mr. Schrock. Help me understand why the 30--I should know 
this but, help me understand why the 37-cent did not have a 
transportation cost.
    Mr. Burrus. It was put in the mail in Washington, and I 
live in Washington.
    Mr. Schrock. OK, I guess I think everybody lives in 
Chicago, and they do not. I understand.
    Mr. Burrus. While the one put in the post office in 
Greenville had to be taken to Washington.
    Mr. Schrock. I see.
    Mr. Burrus. It paid 10 cents less postage than the other 
piece that they could have delivered to me by hand.
    Mr. Schrock. Now I should know the answer to this too. Who 
sets the rates for the businesses, is it you all or is it----
    Mr. Burrus. No, the Postal Rate Commission.
    Mr. Schrock. Postal Rate Commission.
    I want to ask all of you this question. This is one that 
has been on my mind for a long time, and I find it interesting, 
your views on the ability of the Postal Service to participate 
and compete with businesses in non-postal areas. Folks at the 
D.C. headquarters decide what businesses to get into and it is 
your members that are responsible for implementing them. And do 
you think there should be limits on business ventures by the 
Postal Service?
    Mr. Young. My view is I do not know about limits, 
Congressman, but I definitely think the Postal Service has got 
to be allowed to explore new sources of revenue, because unlike 
my colleague to my right here I am pretty much convinced that 
this loss of first class mail is not a cyclical thing, it is 
something that is being created by the alternate electronic 
means that are available to people, and in my judgment this 
problem is going to get worse and worse as we go along and not 
better and better.
    Having said that, I have been meeting with some of the 
competitors, to be honest with you, and I have been talking to 
the CEO of UPS and other competitors, because I understand that 
allowing us into some markets can be trampling on other 
people's--where they are at now, and they are going to have 
some concerns with that. In my testimony, I suggested to you 
all that I think we can strike a balance, if everybody is 
interested in the survivability of the Postal Service--and 
look, the CEO of UPS told me they do $200 million worth of 
business with the Postal Service every year, that they are not 
interested in carrying letters, that their business is packages 
and really packages over 1 pound. So I was encouraged by that. 
I just think what should happen is we ought to take the 
approach that my union has been taking since 1993 to be honest 
with you. We have been meeting with all of the stakeholders and 
trying to consider everybody's view and trying to let everybody 
get into this so we do not cripple anybody or hurt anybody. All 
of us working together have the same objective: to improve the 
viability of the U.S. Postal Service because it serves us all, 
in one capacity or the other.
    Mr. Schrock. Dale.
    Mr. Holton. I do not know that I have an opinion on non-
postal-related business, and what I think of are retail items 
in the postal lobby, which I look at as more of a convenience 
for customers that promote--if you look at a lot of it, promote 
philatelic items, maybe T-shirts and mugs, and that kind of 
thing. But, I understand what Bill is saying about the other 
things out there, that the Postal Service needs to have the 
ability to look into the other ventures that might be postal 
related, and if they are not then those things need to be 
carefully monitored to make sure we do not get into a different 
business.
    But I have always taken the perspective that the Postal 
Service is a business that has to survive and do whatever it 
can, as long as it is within the bounds of what the law says. 
So I guess that is where I am with non-postal-related business 
ventures. What we can do to help the Postal Service survive I 
would be in support of, but I would not want it to go too far 
to a point where it infringes on other people, other business.
    Mr. Schrock. Other commercial ventures.
    Mr. Holton. Right.
    Mr. Schrock. Mr. Hegarty.
    Mr. Hegarty. I believe they should be allowed to engage in 
retail operations that are reasonably related to the postal 
business. As Dale mentioned, T-shirts, lapel pins, if some one 
buys a T-shirt, hats, things like that--if they buy a T-shirt 
or something like that at the post office while they are buying 
stamps I do not think that hurts any competitors. I do not 
think that is one less T-shirt they are going to buy.
    Mr. Schrock. But if you start selling groceries, that is 
where it stops.
    Mr. Hegarty. There you go. If they can engage in 
moneymaking ventures that will help them maintain universal 
service, although we have not defined it yet, or help them keep 
their head above water financially, I think it is a good thing 
for the Postal Service.
    Mr. Schrock. That is probably something we need to do, 
clearly define universal service. Because is it here, is it 
here, is it here. Mr. Burrus.
    Mr. Burrus. Yes, I support the Postal Service's right, new 
right, to engage in new enterprises, understanding clearly that 
it is opening up Pandora's box. There will always be the 
question of cross-subsidization.
    Mr. Schrock. Cross what?
    Mr. Burrus. Cross-subsidization: taking the profit from 
first class mail that is protected by the monopoly and using 
that profit to subsidize a new market. There would be the other 
issues of whether or not the business the Postal Service is 
entering is best served by the private sector and whether or 
not a government agency should be involved in such activities. 
It would open up a whole range of issues that the Postal 
Service would have to respond to, but I do favor their 
expanding their base.
    There are many services we can perform in our current 
environment. The recently passed Medicare legislation, 
prescription drugs, there is no better vehicle to provide that 
service to the American public than the U.S. Postal Service. We 
are in every community. We already serve as a service with 
draft registration, and other places that have a hard time with 
their drivers' licenses, particularly Washington, DC, they 
could use some postal facilities for something like that.
    So we could expand under our existing charter, but I do 
favor expanding that charter to permit commercial. I caution 
everyone, the Postal Service has had attacks upon its share of 
the market in the past. We have survived the telephone, the 
telegraph, and I believe we will survive technology.
    Mr. Schrock. You will survive these things.
    Mr. Burrus. Yes, I think we will survive, because every day 
I look at my mailbox. My mail is not determined by the number 
of letters I have sent, the mail I receive goes up every month, 
every month. I receive more letters today than I did 10 years 
ago.
    Mr. Schrock. Oh, I am on every sucker list in the world. 
Yeah, I really am.
    Does the sale of those items like the hats, the shirts, the 
cups, does that really impose a hardship on those great folks 
behind the counters?
    Mr. Burrus. I was pleased to hear from the Mail Handlers 
that they would like for my members to sell T-shirts and caps; 
we have been there, done that. That was not a major revenue 
generator. It caused some distraction in our lobbies. If they 
expand their base, I certainly would not suggest that they go 
into the direction of T-shirts and mugs.
    Mr. Schrock. And if it is not a major revenue generator, 
why are they doing it?
    Mr. Burrus. In most places, I think they have scaled back, 
they are not doing much there.
    Mr. Schrock. Oh, they are not, OK.
    Mr. Burrus. It was, by and large, a failure.
    Mr. Schrock. Thank you. I have really enjoyed listening to 
you all. Thank you, Mr. Chairman.
    Mr. McHugh. I thank the gentleman. I promised not to 
editorialize, but I was lying. I happen to be one of the people 
that believe that parcel post and packages by the Postal 
Service is not competing against the private sector. I happen 
to believe the private sector is competing against the Postal 
Service, because long before there were these--and they are 
wonderful companies--these private companies doing this, the 
Postal Service was doing it. And I know, back to Pierrepont 
Manor, you remember that I mentioned it a few moments ago, when 
you use one of these private companies you get a surcharge 
because you are in a zip code that is not quite as profitable. 
I think it is interesting that some of these private companies 
have created a relationship with the Postal Service whereby you 
are carrying their packages the last miles. So I mean, I reject 
that, I do not think there ought to be a Postal Service used 
car lot, and we need to ensure that we are focusing the----
    Mr. Schrock. I think some Members liked that, they shook 
their heads yes.
    Mr. Young. Selling cars.
    Mr. McHugh. Under the current law you could. So, I mean, we 
have to strike a balance here, and I do think there are things 
we can do, in fairness to private companies, to level that 
playing field absolutely, and we need to do that.
    I would also like--just a question, because I know Bill 
Burrus said he had been in there 50 years.
    Mr. Burrus. 1954.
    Mr. McHugh. Now you are under oath, Mr. President. How old 
are you? Yeah, and then my colleague, from Virginia, says, 
``Were there not child labor laws back then?''
    Mr. Burrus. You want on the record my age under oath?
    Mr. McHugh. You can take the fifth.
    Mr. Burrus. 67.
    Mr. McHugh. Are you really? God bless you. You do not look 
it. I would like to say I would like to look that good when I 
am 67; I would like to look that good now. That is remarkable, 
my compliments to you.
    Mr. Davis, do you have any further questions?
    Mr. Davis. No, I am satisfied with listening to this panel 
and, you know, I want to invite them back again when the 
weather is a little different, but we were pleased that they 
have been here.
    Mr. McHugh. Sir?
    Mr. Young. Could I just have an opportunity to--I would 
just like to put one thing on the record if I could. I was 
advised of the outcome of the Senate hearings yesterday, and I 
want to issue a formal apology to the Congress on behalf of the 
members of the National Association of Letter Carriers. As I 
reflect back over the years, I think too often we ran to 
Congress and complained because we were unable to adjudicate 
our differences with postal management. And I think what gets 
done is that led a lot of Congresspeople to think that we need 
your assistance. And I just wanted to--in the arena--we 
definitely need your assistance, believe me when I tell you 
that, but in the arena of collective bargaining I just want to 
have one last chance to convince you that I am now of the 
mindset that was just because we were not sophisticated enough 
to deal with the issues we had to deal with. And I am more 
encouraged now than ever that the capacity to engage in 
meaningful labor relations is built into the system that we 
have, it does not need to be messed with. And I am terrified 
that somebody is just going to discard the 34 years that it 
took us to learn this process and replace it with something 
that is going to make us start all over again, and then there 
will be screaming and hollering when neither one of us can make 
an immediate adjustment to it.
    So I thank you, for giving me that opportunity and on 
behalf of over 300,000 active and retired letter carriers, I 
apologize if we have misled Congress into believing that we are 
unable to deal with our own labor relation issues. And I am 
here to tell you that I do not feel that way and my members do 
not feel that way, and I hope that the past has not done too 
much to be able to convince you that is not so. And I thank you 
for allowing me to say that, sir.
    Mr. McHugh. Well, President Young, I appreciate that. You 
know, as I mentioned in my opening comments, we worked very 
hard over more than 8 years to try to do something that is 
necessary, do something that is positive, and do something that 
is achievable. I mean, we could go through the academic 
exercise of talking about postal reform, and I have been doing 
it now for over 8 years. The only true measurement on Capitol 
Hill of success is passing a bill and getting it signed, and 
the agreement we had last year, for a whole host of reasons, 
put aside, did not bring into its context the kinds of things 
that you are talking about.
    I fully respect the President's Commission in the 
recommendation that they made in this area. They were charged 
to look at the full range of issues and they did, I think, 
outstanding work. But speaking for myself, I do not see a 
political small calculation that allows us to go in and address 
the issue, particularly that you just spoke about, in a 
successful way. And I do think we need to take some positive 
steps, and I might be proved wrong there, I am not trying to 
prejudice this process, and we are trying to keep an open mind 
and we will. Your apology is appreciated. I am not sure it is 
necessary, but it is appreciated and taken not just for the 
record, but into our recognition.
    So, gentlemen again, thank you, I was trying to be, and I 
hope I was very sincere about the amazing work that your 
employees do. And the service that you provide to every 
American, each and every day, God bless you. Thank you.
    [Pause.]
    Mr. McHugh. I would like to welcome the members of our 
second panel. And as happened with the first panel, the first 
order of business, prior to my having the honor of introducing 
them, is to ask them to rise and raise their right hands, so we 
can do the oath as required under the committee rules.
    [Witnesses sworn.]
    Mr. McHugh. The record will reflect all three of our 
distinguished panelists responded in the affirmative.
    We have next, in the order they are presented here and in 
the order I see in which they are seated, Mr. Olihovik, who is 
national president of the National Association of Postmasters 
of the United States. Now we welcome Mr. Steve LeNoir, 
president of the National League of Postmasters, and Mr. 
Vincent Palladino, president of the National Association of 
Postal Supervisors. Vince, good to see you again. Gentlemen, 
thank you so much for being here. Thank you for you patience.
    As I noted with the previous panel, we do have your written 
testimony, and without objection they will all be entered into 
the record in their entirety. Hearing no objection, so ordered. 
To the extent it is possible, we would ask you to summarize 
those, and gentlemen, our attention is yours.
    So, with that, President Olihovik, welcome sir, we look 
forward to your comments.

  STATEMENTS OF WALTER M. OLIHOVIK, NATIONAL PRESIDENT OF THE 
NATIONAL ASSOCIATION OF POSTMASTERS OF THE UNITED STATES; STEVE 
D. LENOIR, PRESIDENT OF THE LEAGUE OF POSTMASTERS; AND VINCENT 
  PALLADINO, PRESIDENT OF THE NATIONAL ASSOCIATION OF POSTAL 
                          SUPERVISORS

    Mr. Olihovik. Mr. Chairman and distinguished members of the 
committee, on behalf of the 42,000 members of the National 
Association of Postmasters of the United States, I welcome the 
opportunity to share with you my thoughts regarding the need to 
update the Postal Reorganization Act of 1970. I would be remiss 
if I did not thank you, Mr. Chairman, for your strong 
leadership with the introduction of the Postmasters Equity Act 
recently signed into law by President Bush. Congressman Davis 
and Congressman Schrock, you also have my deep appreciation for 
your strong support for that bill as well.
    The consistent erosion of first class mail even in times of 
plenty is an ominous sign for the Postal Service. During the 
third quarter of last year the Gross Domestic Product rose by 
an impressive 8 percent. Yet, the Postal Service projects a 3.2 
percent drop in first class mail volume.
    As you know, this committee assisted the Postal Service, if 
only temporarily, by passing Public Law 108-18. The CSRS 
legislation provided a short reprieve; however, Congress needs 
to revisit the issue as part of your postal reform effort. It 
is important to reverse the decision to shift the military 
retirement liability onto the Postal Service. In addition, the 
Postal Service must be permitted to use the escrow that will 
accrue as the result of the CSRS recalculation. Over the last 2 
years, the Postal Service has successfully reduced costs to 
balance shrinking revenue. However, the Postal Service cannot 
continue to chip away at costs without influencing the quality 
of mail service that Americans expect and demand. Rather, we 
need the tools and flexibility that are essential to grow 
revenue. President Bush has emerged as a strong ally in your 
effort to push forward.
    The fundamental mission of the Postal Service remains 
unchallenged. The institution performs an inherently 
governmental function and it should continue to provide 
affordable universal postal services. This policy matter 
Congress must reserve to itself and not delegate to a postal 
regulator. Universal service encompasses a nationwide retail 
and delivery network that reaches into every city and town. It 
is clear that under current law and postal regulations, the 
Postal Service may, and in fact does, close post offices. This 
authority is not to be taken lightly. NAPUS urges Congress to 
reject attempts to weaken those rights afforded to American 
communities. In many situations, this is the only opportunity 
for communities to appeal post office closures.
    NAPUS has worked with communities in safeguarding their 
legal rights to protect their post office. As part of this 
effort, NAPUS publishes and circulates ``The Red Book: A NAPUS 
Action Guide for preventing the Closing or Consolidation of 
Your Post Office.'' In addition, NAPUS has worked closely with 
the Congressional Rural Caucus to safeguard a community's due 
process rights. Mr. Chairman, I request that the committee 
include the NAPUS Action Guide as part of the official hearing 
record.
    Mr. McHugh. Without objection, so ordered.
    [The information referred to follows:]

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    Mr. Olihovik. Closing small post offices is a dreadful and 
misguided strategy. Such actions would have a devastating 
effect on many communities yet have little impact on postal 
finances. As Robert Cohen of the Postal Rate Commission 
testified before the Presidential Commission, closing the 
10,000 smallest post offices would only net savings of about 
$567 million, considerably less than 1 percent of the Postal 
Service's operating budget. The postal network is not merely 
the sum of its parts, it is an integrated system which relies 
even on its smallest components. Americans expect access to a 
full service post office. The Postal Service's own 
transformation plan recognized this reality. Despite the fact 
that 70 percent of postal customers are aware that postal 
products might have been available elsewhere, 80 percent of 
stamp sales continue to take place at the post office.
    It is crucial that the Postal Service have the flexibility 
to respond to and anticipate customers' needs. In part, the 
President, his Commission, and legislation considered by the 
House Government Reform Committee understood the barriers 
erected by the act. In response, a consensus emerged that 
endorsed providing the Postal Service with enhanced pricing 
strategies. Permitting the Postal Service the ability to adjust 
postage rates within defined limits would be an appropriate 
mechanism to grant the agency enhanced pricing flexibility.
    Postal Headquarters recently put into place a new pay for 
performance program. This replaced the controversial EVA 
program. The link between performance incentives and achieving 
corporate goals reflects the strategy employed by the private 
sector.
    It is important to note that it is difficult to manage a 
postal facility when performance incentives are inconsistent. 
The managerial force is compensated using a system that rewards 
performance. The current salary structure for craft employees 
does not reward performance. Unless, we are somehow able, 
through collective bargaining, to create a pay plan that 
rewards individual or unit achievement, we will miss a crucial 
opportunity to optimize efficiencies and encourage exemplary 
performance. In sum, the present pay system compromises the 
workplace by rewarding one set of employees, yet insulating 
another. This practice adversely affects morale and 
performance.
    We must also do a better job with our unions to train 
employees to perform different tasks within the post office. We 
should work with the crafts to lower or eliminate barriers that 
preclude postmasters from assigning personnel different duties 
within a post office. Postal employees should have the 
flexibility and training to cross over and perform a variety of 
tasks. I would also suggest that cross training improves job 
security for those employees whose skills could become 
obsolete.
    Finally, NAPUS remains extremely concerned about the 
Presidential Commission suggestion to sunset FEHBP and for its 
coverage of the postal employees. The proposal would subject 
health and retirement benefits to collective bargaining. My two 
primary concerns with the proposal are that it does not address 
the impact upon current and future postal retirees and it 
ignores the effect that separating postal employees from the 
health and retirement programs would have on the entire Federal 
benefits program.
    Mr. Chairman, this concludes my remarks. I look forward to 
working with you and other members of this panel as we strive 
to ensure that the Postal Service will prosper for many years 
to come.
    Mr. McHugh. Thank you, very much, Wally. Appreciate your 
effort to be here and your continued support and interest in 
this process.
    Next, as I have introduced previously, Mr. Steve LeNoir, 
who is president of the League of Postmasters. Steve, thanks.
    [The prepared statement of Mr. Olihovik follows:]

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    Mr. LeNoir. Thank you, Mr. Chairman and members of the 
special panel. Thank you for inviting me to appear before you 
today. My name is Steve LeNoir and I am the president of the 
National League of Postmasters. Before coming to Washington, 
DC, I served as postmaster in Horatio, SC for the last 23 
years. And while you say Pierrepont Manor has a population of 
214, my community has well over 1,000 citizens in it.
    Mr. McHugh. Actually, to be honest, 213, because I am out 
of town today.
    Mr. LeNoir. Chairman McHugh, I want to publicly thank you 
for your efforts over the last decade on the behalf of the 
Postal Service, and we look forward to working with you and 
your committee. And Congressman Davis, we thank you for hosting 
this hearing.
    I welcome the opportunity to discuss the important issue of 
postal reform. Started in 1887 to represent rural postmasters 
and formally organized in 1904, the National League of 
Postmasters is a management association representing the 
interests of all postmasters. Although we represent postmasters 
from all across the country, from the very largest to the 
smallest post offices, rural postmasters are a sizable portion 
of our membership. The League speaks for thousands of retired 
postmasters as well. Mr. Chairman, we would like to thank you 
and your colleagues on the Government Reform Committee for your 
dedication to the issue of postal reform.
    Postal reform is critical to the long term ability of the 
Postal Service to provide affordable universal mail service to 
every individual, home, and business in America. There is no 
doubt that the Postal Service needs fundamental change. We know 
that our jobs and those of the people we manage are ultimately 
at stake. While we know that the Postal Service's 
transformation plan takes us in the right direction, we also 
know that legislative reform is necessary to finish the 
process. We commit ourselves to work with you to make this a 
reality.
    Mr. Chairman, as Congressman Davis stated in his opening 
remarks, the most critical issue facing the Postal Service now 
is the civil service retirement issue. Last year's legislation 
corrected an overpayment to the CSRS that saved the Postal 
Service billions of dollars, but put those savings from 2006 on 
into an escrow account. The Postal Service has suggested using 
it to pre-fund retirees' benefits, thus funding one of the 
biggest unfunded liabilities that the Postal Service would face 
in the future. We think this is an excellent idea.
    Also, last year CSRS legislation forced the Postal Service 
to assume the responsibility for $27 billion in military 
retirement benefits that were earned by postal employees before 
joining the Postal Service. That responsibility is not one that 
the Postal Service should bear, and it deserves to be 
transferred back to the Treasury. We strongly urge Congress and 
the committee to make both of these issues a top priority.
    On December 8th of last year, the Bush administration 
called on Congress to enact postal reform and listed five 
principles that it believes should guide postal reform. We 
believe these five principles are an excellent foundation for 
postal reform.
    One issue that does concern us is the possibility of 
closing rural post offices. The League is concerned that access 
to a post office in a rural community could dramatically change 
if postal reform is not implemented properly. We are 
particularly concerned that overzealous individuals could 
develop a mistaken belief that closing small post offices would 
net meaningful savings for the Postal Service. As my colleague, 
President Wally, pointed out, the facts do not support that. 
The record shows that the cost of the 10,000 smallest post 
offices is less than 1 percent of the total budget for the 
Postal Service.
    Mr. Chairman, rural post offices are a key to a healthy 
rural economy and are necessary to provide a universal service 
in rural America. As supported by our written testimony, the 
local post office is an American institution that literally 
binds rural America together politically, socially, and 
economically. It is the lifeblood of rural communities and it 
should not be harmed.
    No less important are small post offices in inner city 
areas. They provide a vital link to the Postal Service and the 
country and they also should not be harmed. While we understand 
there may be a legitimate reason to close a post office, we do 
not believe that the existing rules pertaining to these 
closings of post offices should be changed. These rules are 
fair to the customers, the local community and the Postal 
Service.
    The League of Postmasters looks forward to working with you 
and your committee in passing responsible postal reform and we 
pledge ourselves to that effort. And I would be happy to answer 
any questions the committee may have.
    [The prepared statement of Mr. Lenior follows:]

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    Mr. McHugh. Thank you very much, Steve. Let me ask you a 
question. It has nothing to do with postal reform, but what is 
the name of the post office, in Horatio?
    Mr. LeNoir. It is the Horatio Post Office.
    Mr. McHugh. What is the name of your Member of Congress, 
and I do not mean to embarrass you, if you do not know?
    Mr. LeNoir. John Spratt and also Jim Clyburn, I am right on 
the line between those two.
    Mr. McHugh. Well, the reason I ask, the folks in the 
audience do not have the benefit of the written testimony I do 
not believe, maybe they do. They do not have the benefit of the 
written testimony, just in case you think this gentleman's 
association with the post office is tenuous, according to his 
written testimony, he comes from an old postal family, ``when I 
speak of the Postal Service, I speak from a century old 
tradition.'' Steve's wife is a postmaster in South Carolina and 
she was a postmaster in West Virginia before that. His mother 
was a postmaster for 32 years, and as he absolutely correctly 
noted, the type of dedicated person that worked in the Post 
Office right until the day he was born. And his great-
grandfather, Walter LeNoir, was Postmaster in Horatio, where he 
has been Postmaster since, what 1981?
    Mr. LeNoir. 1900-1935.
    Mr. McHugh. His, I mean you, the same post office.
    Mr. LeNoir. Yes, I have been there since 1981.
    Mr. McHugh. If we do not name this one the LeNoir Post 
Office, there is something wrong. We will have to talk about 
that. In any event, thank you very much, sir.
    It hasn't been since 1900 that Vince Palladino has been in 
his esteemed position, but when I began this process and had 
the honor of serving as the chairman of the Postal 
Subcommittee, in my second term in the House of 
Representatives, Vince Palladino at that time was president of 
the National Association of Postal Supervisors, and it is a 
comfort to me and I am sure to his many members that he remains 
the president. So, Vince, it is good to see you again; welcome, 
and as always we look forward to your comments.
    Mr. Palladino. Thank you very much, Chairman McHugh. I have 
reduced my remarks due to the pending storm, possibility of 
fire or other hazards. [Laughter.]
    Thank you, Chairman McHugh, for the opportunity to appear 
before the Special Panel on Postal Reform and Oversight on 
behalf of the 36,000 postal supervisors, managers and 
postmasters who belong to the National Association of Postal 
Supervisors. I am pleased to be here today to participate in 
this hearing to add our voice in support of congressional 
passage of comprehensive postal reform. This hearing is an 
important step toward the achievable goal of passing a postal 
reform bill this year.
    My testimony today is devoted to four areas that should be 
embraced by postal reform: rationalizing the postal network, 
achieving effective labor-management relations, improving pay 
and performance incentives, and postal pension funding reform.
    We agree with the Postal Commission that the current 
network of post offices and plants requires streamlining, 
leading to the closure of unneeded facilities, to assure that 
universal service is delivered in the most effective and cost-
efficient manner possible. Indeed, many of the Nation's post 
offices are probably no longer necessary to fulfill the 
universal service obligation.
    Streamlining or rationalizing of the postal network should 
be carried out on a comprehensive basis under the authority and 
the control of the Postal Service, in consultation with 
Congress and its stakeholders. The ultimate aim should be to 
arrive at cost savings while preserving affordable universal 
service.
    We see no need for the establishment of a Postal Network 
Optimization Commission [PNOC], as recommended by the 
President's Commission, applying a base closing approach to 
unneeded postal facilities. The Postal Service is the best-
equipped entity to arrive at the optimal number, location and 
function for the mail processing and distribution functions, 
just as the Postal Service is similarly equipped to arrive at 
the optimal number, location and function for post offices.
    Under current law, the Postal Service is not allowed to 
close post offices for economic reasons alone. The Commission 
recommended that such statutory restrictions be repealed and 
that the Service be allowed to close post offices that are no 
longer necessary for the fulfillment of universal service. We 
agree and urge the Congress to grant the Postal Service the 
flexibility and necessary accountability in fair and rational 
ways to fulfill its universal service obligation in a cost 
efficient and effective manner.
    From my perspective, as president of one of the foremost 
management associations within the Postal Service, progress is 
being achieved in fostering better communication at the 
national level between the Postal Service and the leadership of 
the craft unions and the management associations. However, 
progress in lower levels and in other areas continues to remain 
uneven, especially in the resolution of grievances.
    The Postal Commission noted that ``Encouraging progress is 
being made by the Postal Service and one of its unions in 
resolving grievances through the use of a streamlined grievance 
process involving a Dispute Resolution Team [DRT], comprised of 
representatives of management and the craft. We believe the DRT 
approach is best directed to the resolution of contract-related 
disputes in the field where they begin, while workplace 
environment disputes are best resolved by mediation. We also 
are concerned by the growing reliance by DRT upon non-binding 
arbitration decisions as precedent by Dispute Resolution Teams. 
We encourage the panel to continue its oversight in these 
endeavors.
    Recently, the National Association of Postal Supervisors 
and postmaster organizations have collaborated with the Postal 
Service in establishing a new pay for performance system, 
reshaping the EVA system first established in 1995, that better 
rewards teamwork, efficiency, and service quality in a fair 
manner. Measurable and realistic goals are now being 
established at the unit, district and area levels as part of 
the new system; progress is being made. We agree with the 
Commission that it is time to expand merit-based pay to the 
entirety of the postal work force, including bargaining unit 
employees. The establishment of an incentive-based culture of 
excellence in any organization relies upon performance 
management systems that reach across the entire organization 
and cover all employees, not only those in management ranks.
    The Commission urged the Postal Service to undertake a 
study of performance-based compensation programs for both 
management and union employees and work with the unions and 
management associations to design and implement a performance-
based compensation program. We are counting on the Postmaster 
General and the craft unions to negotiate some form of pay for 
performance at the bargaining table. We also urge Congress to 
repeal the current statutory salary cap as it applies to the 
Postal Service--currently $171,900--and that the Postal Service 
be authorized to establish rates of pay for top Postal Service 
officers and employees that are competitive with the private 
sector. Additionally, we encourage the special panel to take a 
critical view toward the necessity of establishing a new 
regulatory body, such as the Postal Regulatory Board, to assume 
authority over total compensation, scope of the monopoly, 
definition of universal service, as well as other important 
policy and regulatory powers exercised by Congress, the Postal 
Rate Commission, and the Postal Service itself.
    Similarly, we question the wisdom of subjecting Postal 
Service pension and post-retirement health benefits to 
collective bargaining. This could significantly impact the 
vitality of the entire Federal pension and retiree health 
benefit programs, and we caution Congress to move very 
carefully in full consultation with the postal stakeholder 
community before proceeding in these areas. We support the 
Postal Service's proposal to eliminate the escrow requirements 
so the Service would not have to include $3 billion as a 
mandated incremental operating expense in fiscal year 2006. We 
also support relieving the Postal Service of the burden of 
funding retirement benefits attributed to military service and 
returning that responsibility to the Department of the 
Treasury. We support the use of savings to pre-fund retiree 
health benefits obligations for current and former employees, 
estimated at approximately $50 billion. Under the proposal, the 
funds would stay in the Civil Service Retirement System and 
therefore not impact the Federal deficit. Finally, we have 
recently been apprised of the difference in methodology used by 
the Office of Personnel Management and the Postal Service in 
determining the Postal Service's CSRS obligation. We were very 
surprised to learn that according to the Postal Service 
calculation, its obligation is $86 billion less. Somebody has 
to take a look at that.
    Thank you for the opportunity to present these views. We 
look forward to continuing to work with you, Mr. Chairman, and 
the committee, to secure a sensible postal reform. And I remain 
available to answer any questions.
    [The prepared statement of Mr. Palladino follows:]

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    Mr. McHugh. Thank you very much, Vincent, and again I 
deeply appreciate your years of commitment to this, I 
congratulate you.
    As I had a chance to go through your written testimony, all 
three--with the exception of the approach on some of the 
closure issues--you obviously all three are pretty much on the 
same page. One of the issues that the Commission identified in 
what they called ``critical'' to controlling the future costs 
of and capabilities of the Postal Service is the ability of 
management and labor to work together to constructively 
determine the right size of the Postal Service work force, as 
they put it, to ensure flexibilities in its deployment. As 
management associations, your folks are out on the floor and 
are the main line of interface between management and the 
workers. What do you feel, if anything, is something that this 
panel should work to get into whatever reform bill we might do 
legislatively to enhance that opportunity for cooperation and a 
better work force management relationship? Is there anything 
legislatively or is that just something that has to be worked 
out almost on a personal level? Wally.
    Mr. Olihovik. Mr. Chairman, I do not know about 
legislatively. It could possibly be done internally among 
ourselves. I think one of the biggest things that we all seem 
to agree on is the pay for performance program that we put 
implemented. I have been in the Postal Service now for over 25 
years. I think we have made some tremendous strides with the 
unions. If you take a look at the individuals that you had up 
here before us, I think each and every one of them had a 21st 
century mentality of where this organization, the Postal 
Service, needs to go.
    We all have to clearly be on the right path and it should 
be the same path. I mean, I am very, very optimistic about the 
new pay for performance program that we have recently talked 
with the Postal Service Headquarters about. We had a lot of 
input into that program. But, as I said in my prepared remarks, 
it is very, very, difficult when you have one group going in 
one direction, being rewarded for a certain set of principles, 
and another group going in another.
    I think the idea of striving for excellence together will 
really bring us right at the end. And I know it is not going to 
be as easy as I possibly think it might be at this point in 
time. But, we have good recognition. I mean, being a 
postmaster, I have held a lot of positions in the Postal 
Service. I will tell you, being a postmaster, looking at some 
of my fellow postmasters, they are some of the most dedicated 
people. We are the people that are out there on the front lines 
every day dealing with customers, and we fully realize, Mr. 
Chairman, that those customers are not our enemies. Those 
customers are our valued customers, and we need them. I would 
rue the day that they ever thought of taking their business and 
going elsewhere. So, it is going to take a collective effort to 
head in the right direction. I think that the pay for 
performance model that we are under now is a good first step.
    Mr. McHugh. Thank you, sir. Steve.
    Mr. LeNoir. I would also like to point out that relations 
between the unions and management associations and postal 
headquarters, I believe, is at an all-time high. I think we are 
working together on the same page, and I think we want to 
continue in that direction.
    I would also like to point out that the number of 
grievances has decreased dramatically. That was a major problem 
2 to 3 years ago that the Postal Service decided to tackle head 
on, and I believe we have made a lot of progress in that area.
    One area that I do think we could work toward is 
flexibility in how we can use our employees. Currently, in a 
large post office, if a clerk has down time and tries to push a 
mail cart across the floor, that is mail handler work. We may 
need a little flexibility in how we can use our employees. And 
I am not certain if that is a legislative remedy or if that is 
just something we need to sit down and work with our unions on, 
to revise outdated rules.
    Mr. McHugh. Thank you. Vince.
    Mr. Palladino. To be blunt, I do not think we need any 
legislation. I think with the new Postmaster General in 
cooperation, we have been working together, things will change, 
but I think it has gone pretty fast. You were there when we had 
to go through the Federal Mediation to have a meeting. We do 
not do that anymore, the Postmaster General calls it, everybody 
shows up, we all have our say and I think we can do better in 
the future; in fact I know we can.
    The workroom floor rules can be talked about with the 
craft. I think they are responsive today and we are working 
together. So I would rather it be left with the Postmaster 
General and the stakeholders to make this Postal Service better 
and better.
    Mr. McHugh. Thank you, sir, I appreciate it. Mr. Davis.
    Mr. Davis. Thank you very much, Mr. Chairman.
    Gentlemen, as we go through this process of determining 
what the postal system is going to look like, I think there is 
going to be a great deal of conversation trying to determine 
what universal service will actually mean. And I think we are 
going to look at the whole notion of what extent do we 
consolidate or will we see the consolidation, especially of 
smaller postal units, throughout the country. Could you help me 
with how you think we can reconcile those two notions. One, 
universal service, what are we really talking about, and 
whether or not consolidation of any units will help shape the 
ability to provide universal service in terms of resources 
being available to do that, so could you----
    Mr. Olihovik. Congressman Davis, I would like to say my 
definition of universal service is delivering every day to 
everybody, and one of the things that is very important that we 
have to keep in mind is uniform pricing. I think on one of the 
last panels we might have gone a little bit on a tangent with 
the cost of pricing, taking it from one location to another. I 
for one, would hate to see the day where we are charging all 
sorts of different prices throughout this country based on 
where you live. I think that would be the absolute wrong way to 
do it. We can never look upon rural America as being second 
class citizens.
    As far as looking at what the network might look like, I am 
absolutely certain that, in order to be successful, we are all 
going to have to be involved in shared sacrifices, there is no 
doubt about that. There are some people who believe that you 
cannot close post offices. There is nothing written anywhere 
that says you cannot close a post office. There is no 
moratorium as of today on closing post offices. We have a very 
defined process and the historical record will speak for 
itself. When that process has been followed, we have in fact 
closed 14,000 post offices within the last 30 years. There are 
other options and in many of our big cities we have things 
called contract postal units to assist.
    The process was put in place for a very, very good reason, 
because before you take that drastic step of telling a 
community that you are going to close their post office, you 
better take everything into consideration. It would be very 
different if you were to define why we should be closing post 
offices. I would suggest to you if you use the yardstick of a 
post office losing money that would be an improper yardstick 
for closing a post office. I would suggest, if you look at the 
record, that in the State of Maine, where Chairman Susan 
Collins is from, that if you were to use that yardstick for 
closing a post office, you would in fact close 77 percent of 
the post offices in the State of Maine. And where committee 
member John Sununu is from, my home State, New Hampshire, you 
take a look at that you would be closing a similar amount.
    I do not think that is the way to go. I think that the 
process is an established process and I think if people follow 
the process, the Postal Service has done it--and as I said, 
14,000 post offices have in fact been closed by following that 
process over the last 30 years.
    Mr. LeNoir. Congressman Davis, I appreciate your effort to 
try to get a clear definition of universal service. We share 
that same concern.
    My friend Dale Holton from the Rural Carriers said that the 
rural carriers were a post office on wheels and provided every 
service that the post office did. I respectfully disagree with 
that assessment. Just like in the weather here, would you like 
for your grandmother to have to figure out when the rural 
carrier is coming by her house and sit out in front of the mail 
box and wait for services? I just do not think it is an equal 
service if you take that option away from rural America.
    There are so many things that we do in those offices that 
it is hard to put a dollar value on. We have people in my 
hometown that did not have an educational opportunity and we 
help fill out money orders, answer mail and do things for those 
people that otherwise would not be done, and it is very hard to 
put a dollar amount on those things.
    As far as the network of plants and things of that nature, 
we are a customer of the plants, we ultimately receive the mail 
at our post office put together by those plants. And how they 
are aligned, we are not taking a strong stance on that now, we 
just want to do what is best for the Postal Service. But I 
think the key is to utilize the full value of the network that 
we have out there. I do not think we fully maximize the value 
of our post offices. And I think there are other services that 
we could be providing that would bring us closer to the break 
even point.
    Mr. Palladino. I have a wider prospect on what you--on the 
question you are asking. We are in a position where we are 
losing mail and losing revenue and doing what every company in 
the United States today is doing, we are reducing support jobs, 
and we will reduce plants. If we can get the mail to the post 
office with one less plant the post office is going to do it.
    And the reason that we are looking for some help is 
because, I think, if we get this help from you all, we can do 
it through attrition, not through something that has to be done 
drastically like we did in 1992. But eventually we are going to 
cut somewhere or we are going to have to go for subsidy.
    So I think it is like a ``catch 22;'' we want to get to the 
most efficient source with the right price and in order to do 
that we are looking for postal reform, for flexibility to get 
there. And I do not know if that answered your--I think you 
were talking about downsizing. I think it is a fait accompli. 
We are going to right-size or whatever term you want to use, 
they are looking at all of our support positions to bring it 
down to where they can serve and still serve everybody 
correctly. And the same thing is being done with mail 
processing and possibly post offices.
    Mr. Davis. Well, I do not know if we get there, but it is 
certainly helping as we try to rationalize the most effective 
approach to looking at the needs of all the different types of 
communities that exist in our country and look at the needs of 
those individuals who have given so much of themselves to try 
and make systems work. And your testimony has certainly helped 
me as I try to determine where I am, where I stand and what 
approach I think really works.
    So I certainly want to thank you for coming in and sharing 
and giving that information. That helps a committee or helps an 
individual like myself make a determination when ultimately we 
reach the point where there is no return and you just have to 
simply decide where you are.
    So I thank you very much. Thank you, Mr. Chairman.
    Mr. McHugh. I thank the gentleman as always. Mr. Schrock.
    Mr. Schrock. Thank you, Mr. Chairman, and thank the three 
of you. I want to identify myself with what Mr. Davis said. I 
have learned a lot, too. It was worth coming to this cold city 
to hear all this today and I really appreciate it.
    I was going to ask Mr. LeNoir questions about transferring 
excess post offices in local communities. I will not because 
you have all pretty much discussed that. I think I heard you 
say that the savings would ``only be'' $500 million. I am not a 
rich guy and I would love nothing better than to take $500 
million home to the Second District of Virginia for the 
military, for education, for highways, and a lot of things. I 
would be the hero forever. So, I think that is a lot of money. 
As the man whose name is on this building said, ``A million 
here, a million there and pretty soon you are talking about 
real money.'' To me $500 million is a pretty substantial sum of 
money that I would take any day of the week to take home to the 
district I represent.
    I just have one final question. Do you support allowing the 
postal system to retain their earnings and how do you think 
those earnings should be used? To what use should they be put? 
All of you.
    Mr. Olihovik. I do support that concept. I think there are 
a number of things we can do and I think one of the main things 
that we need to look at is our capital expenses right now. We 
have had too many buildings that have been put on hold as far 
as needed repairs in the facilities and I think that is one of 
the things that we could look at. I do support that concept.
    Mr. LeNoir. Congressman, I also support that concept 
because with the rate cycle we have now, the first year you are 
supposed to make money, and the second year break even, and 
then lose money the third year. It just seems like a vicious 
cycle.
    I would like to comment on your $500 million comment. I 
certainly am not trying to trivialize that amount of money, not 
whatsoever, but if you look at it compared to a $70 billion 
budget, you have to put it into perspective. As we said, we are 
trying to figure out ways we can make additional funds that we 
are not currently making. I will use an example. In my little 
office I put in a fax and copy machine because the closest 
service was 20 miles away. I cannot compete with private 
industry, yet it allowed us to make additional revenue in that 
office and it paid for itself many times over.
    Mr. Schrock. Sure, I agree.
    Mr. LeNoir. So I just think we need to look at solutions 
like that so we can close that $500 million gap.
    Thank you.
    Mr. Schrock. Thank you. Mr. Palladino.
    Mr. Palladino. Repair our infrastructure and reduce our 
debt.
    Mr. Schrock. What is it, $87 billion in infrastructure and 
$90 billion in debt? We need to help.
    Mr. Palladino. Yes.
    Mr. Schrock. Again, thank you. Thank you for allowing me to 
come here and thank you all for being here as well.
    Mr. McHugh. I thank the gentleman for coming here. I have 
been in Congress for 12 years and I still happen to believe 
that, as my colleague from Virginia suggested, $500 million is 
worth thinking about. I know for many that is a rounding error. 
[Laughter.]
    But I think the point that Mr. Olihovik made is still 
relevant, that if you were to close every post office under 
that rubric, the savings would be, in a relative term to the 
entire financial situation of the Postal Service, kind of 
minor. But the political ramifications would be enormous. I may 
have mentioned Pierrepont Manor--[laughter]--you close that 
post office in Pierrepont Manor, in my humble opinion--the mail 
service component is obviously paramount, but that is the one 
public facility we have in that entire community 214--213, I am 
out of town. And it is a meeting place, it is a facility that 
gives a sense of community. Now, I am not saying that we should 
save every post office in America, but I am saying it is 
important and it has to be considered, is the only point I 
would make and I would fully endorse what President Olihovik 
said, in spite of the current impression to the contrary, and 
the Commission made a distinction, it really did. It talked 
about lifting the financial consideration component of the 
barrier against closures. But we can--the Postal Service can 
close post offices today. And I am not encouraging them 
necessarily to do that, but they are empowered, they just have 
to go through a process. I think a community that has such a 
stake in a facility should have available to it a process by 
which to take its case and be heard. Again, I am 
editorializing.
    Before I close the hearing, and with my appreciation to the 
final panel, I want to emphasize something that I hope I made 
clear in my opening comments. We are here today resurrected 
from the grave of congressional irrelevancy, in large measure 
because of President Bush and the work of his Commission, and I 
thank him for that. I hope I made that clear. And if there is 
any question about the interest and dedication of the 
administration to this initiative, I think it is important that 
I underscore that we are joined very quietly, and I do not 
believe he has made his presence known to anyone but he has 
been spotted, by Mr. Roger Kodat, who is the Deputy Assistant 
Secretary, I believe, for Government Financial Policy--did I 
get that right, Roger--who just flew out here for this hearing, 
and came out and sat and listened, and to have a Deputy 
Assistant Secretary of a Federal department here to monitor the 
progress and what has been said, I think underscores what I, as 
I said, tried to convey.
    This is an important issue to this administration, and for 
no other reason alone I commend the President and his 
administration, particularly the Department of Treasury which 
has been so interested in this, for their interest.
    Gentlemen, thank you so much for being here. As I tried to 
indicate, I appreciate the work you do, appreciate the 
management associations' members and the great work that they 
do. When I go in and see my postmaster, you know, she is one of 
yours. And we look forward to working with you collectively on 
a bipartisan basis to try to do something that ensures the 
future one of the most important organizations in this Nation, 
the U.S. Postal Service. God bless you.
    And with that we adjourn and look forward to the next trip 
to Chicago. I hope it is sooner than 7\1/2\ years, as the last 
one was for me.
    Mr. Schrock. As long it is in the summer.
    Mr. McHugh. Yes, well, we will talk to Congressman Tom 
Davis about that. But, Danny, thank you so much for your 
hospitality and thank you for letting us be in your wonderful 
city and district.
    Mr. Davis. Thank you for being here.
    Mr. McHugh. The hearing is adjourned.
    [Whereupon, at 3:28 p.m., the special panel was adjourned.]
    [Additional information submitted for the hearing record 
follows:]

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[GRAPHIC] [TIFF OMITTED] T3087.174



    ANSWERING THE ADMINISTRATION'S CALL FOR POSTAL REFORM--PART III

                              ----------                              


                      WEDNESDAY, FEBRUARY 11, 2004

                  House of Representatives,
      Special Panel on Postal Reform and Oversight,
                            Committee on Government Reform,
                                                    Washington, DC.
    The special panel met, pursuant to notice, at 1:02 p.m., in 
room 2154, Rayburn House Office Building, Hon. John McHugh 
(chairman of the special panel) presiding.
    Present: Representatives McHugh, Burton, Schrock, Miller, 
Murphy, Blackburn, Davis of Illinois, Towns, Maloney, and Clay.
    Also present: Representatives Tom Davis of Virginia, Shays, 
and Waxman.
    Staff present: Robert Taub and Jack Callender, counsels; 
Drew Crockett, deputy director of communications; Teresa 
Austin, chief clerk; Allyson Blandford, office manager; Michael 
Layman, professional staff member; Phil Barnett, minority staff 
director/chief counsel; Kristin Amerling, minority deputy chief 
counsel; Althea Gregory, minority counsel; Denise Wilson, 
minority professional staff member; Earley Green, minority 
chief clerk; and Cecelia Morton, minority office manager.
    Mr. McHugh. The panel will come to order. With the gracious 
agreement of Mr. Davis' staff, the ranking member who is on his 
way--he will be here shortly--he has agreed to let us try to 
begin this hearing. I certainly want to welcome all of you here 
today.
    This is the third installment of three panel sessions that 
we have had during the past 2 weeks. In that task, we continue 
today to examine the President's call for postal reform, which 
he made in December and reiterated again in his budget message 
that was presented to Congress on February 2. Today, we are 
truly honored and want to welcome highly esteemed panels, two 
of them in number, of chief executive officers representing the 
views of customers, competitors and postal-reliant businesses.
    I have said it before and I will say it again, and 
certainly our witnesses, I believe you will hear today, know it 
all too well. The Postal Service is the focus of a nearly $900 
billion-a-year in industry activity. It employs some 9 million 
workers nationwide, and it represents approximately 8 percent 
of our Nation's gross domestic product.
    Our Postal Service is in trouble and it requires reform to 
preserve universal service and prevent a worsening crisis. Last 
week, in a panel held in the ranking member's hometown of 
Chicago, we heard unanimous support from the Postal Service 
employee groups for the administration's broad principles on 
postal reform. Two weeks ago, in our first session, the Postal 
Service itself, along with the administration, the Rate 
Commission, and the General Accounting Office, all testified 
that universal postal service is at risk and that reform is 
urgently needed to minimize the danger of significant taxpayer 
bailout or dramatic postal rate increases. All agreed that the 
Postal Service's current business model, formulated as it was 
in 1970, is no longer sustainable going into the 21st century. 
To understand the challenges at hand, one needs simply to read 
the testimony we received regarding the enormous liability 
still facing the Postal Service, the serious declines in mail 
volume and revenue, changes in the mail mix, increased 
competition from private delivery companies, declining capital 
investment, insufficient increases in postal productivity, 
uncertain funding for emergency preparedness, and major 
impediments to continued cost cutting.
    While the problems are clearly dire, I believe the 
President's principles for legislative change identify a path 
to some solutions. Fortunately, there currently exists the 
strong bipartisan basis upon which to proceed, including the 
highly refined bill that we developed in the last Congress with 
Representatives Davis, Waxman and Burton. Senator Carper has 
introduced an almost identical version of our legislation in 
the Senate.
    The Postal Service is simply too important an institution 
to the people of this Nation, to our economy, to await the full 
brunt of a crisis that is clearly on the doorstep. Indeed, 
there is good reason why this is the first administration since 
that of President Nixon to call on Congress to modernize our 
Nation's postal laws. I remain hopeful, as Congress did in 
1970, that we too, in the year 2004, will answer the 
President's charge and the President's challenge.
    I would like to thank all of our witnesses for appearing 
before the committee today, and I look forward to their 
testimony. I will have the honor of introducing them in a 
moment, but before I do that, as I said, we would like to cover 
opening statements. As I begin to yield, I see the ranking 
member of the full committee, Mr. Waxman, the gentleman from 
California, has joined us. Do you want to make your opening 
statement now?
    Mr. Waxman. Sure.
    Mr. McHugh. I would be delighted to yield to him. He was 
out of the room, so I will repeat it. I deeply thank the 
gentleman for his leadership, for his input, and for being here 
not just today, but through this entire challenge.
    Mr. Waxman.
    Mr. Waxman. Thank you very much, Mr. Chairman. I am pleased 
to join with you in this third hearing on postal reform.
    The Postal Service is one of the country's most venerable 
institutions. Since its inception over 200 years ago, the 
Postal Service has played a vital role in our national 
commerce. Today it remains integral to business activities 
around the country and the world. The postal system supports an 
$891 billion industry, representing over 8 percent of the gross 
national product. Businesses and families across America depend 
each day on Postal Service delivery and services. Rain or 
shine, the Postal Service now delivers more than 200 billion 
pieces of mail a year to roughly 141 million addresses. The 
Postal Service is an American institution that we must protect.
    Yet this historic institution that is so vital to our 
Nation is facing enormous challenges. The Internet and e-
commerce are eroding mail volumes. Security threats like 
anthrax and ricin pose new risks. The Service is operating 
under a set of laws that have not been adapted to the changing 
delivery environment. While the postal pension law we enacted 
last year provided some immediate financial relief to the 
Postal Service, the Postal Service continues to face large 
financial challenges. The Postal Service's unfunded health care 
liabilities alone are estimated at between $47 billion and $57 
billion.
    Our challenge is to modernize the laws that govern the 
Postal Service so that it can remain effective and viable in 
the 21st century. This will not be easy, because the Postal 
Service affects so many parts of our economy. A wide range of 
organizations with many conflicting interests will be affected 
by what we do, but change is essential if we are to strengthen 
and preserve the Postal Service.
    A key part of this process is that we listen well and that 
is why today is so important. Today's witnesses range from 
printers to delivery companies, from a catalog merchandiser to 
a nonprofit organization, from a greeting card company to a 
direct mail marketer. All of these businesses are dependent on 
the Postal Service. The Postal Service's success will 
contribute to their success, and a withering Postal Service 
will impact these businesses, their customers and their 
employees.
    Similarly, these businesses, each in their own way, 
contribute to the Postal Service's success. For example, many 
of the companies we will hear from today play an important role 
in providing the mail volume that is so important to the Postal 
Service's viability. I look forward to hearing their views on 
the importance of rate stability, price flexibility, 
continuation of universal service, and enhanced regulatory 
authority.
    As I conclude my remarks, I want to commend three of my 
colleagues who have taken crucial leadership roles in this 
process: Chairman Tom Davis, Postal Panel Chairman John McHugh, 
and Postal Panel Ranking Member Danny Davis. Chairman Davis 
said last fall that if this committee is going to pass postal 
reform legislation, the legislation has to be a bipartisan 
product, and that is exactly the approach that we have been 
following.
    Thank you all for your interest and I look forward to 
hearing the testimony.
    [The prepared statement of Hon. Henry A. Waxman follows:]

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    [GRAPHIC] [TIFF OMITTED] T3087.176
    
    [GRAPHIC] [TIFF OMITTED] T3087.177
    
    Mr. McHugh. I thank the gentleman, and again express my 
appreciation for rolling up his shirtsleeves as always, and 
becoming so productively involved in this issue.
    Next, I would be honored to yield to the gentleman from 
Virginia, the chairman of the full committee, who truly has 
taken the leadership role in this process, who has not allowed 
it to sit on the back burner, but has dragged the pot from the 
back to the front of the stove, my friend Mr. Davis.
    Mr. Davis of Virginia. Thank you very much. I want to 
begin, Mr. Chairman, by thanking the chairman of the special 
panel, John McHugh, for yielding. I would especially like to 
thank him for his leadership and vision on this important issue 
and for conducting this series of hearings.
    The panel's first two hearings have been very instructive 
and have also made it clear that there is a broad consensus 
developing around the administration's five principles for 
postal reform. Perhaps the stars at long last are aligning. I 
look forward to working with Chairman McHugh, the ranking 
member of the committee, Mr. Waxman, the ranking member of this 
panel, Danny Davis, and other members of the special panel to 
craft postal reform legislation that will allow the Postal 
Service to survive well into this century.
    We have two very distinguished panels of witnesses here 
today and I want to thank each of them for taking the time out 
of their busy schedules to appear before us. I should note that 
the special panel would have benefited greatly from two 
witnesses who were invited to testify today, Mike Eskew, the 
CEO of UPS, and John Fellows, the CEO of DHL Worldwide Express 
in the Americas. Unfortunately, they both had unavoidable 
commitments so they were not able to appear, but they have 
submitted testimony for the record and we will give them an 
opportunity to appear in person later. I want to thank them for 
doing so.
    Mr. Chairman, the last time Congress passed comprehensive 
postal reform many of the technologies that we take for granted 
today, such as fax machines, e-mails, the Worldwide Web, were 
the stuff of science fiction. But the threat of electronic 
diversion to the Postal Service's ability to provide uniform 
service at uniform rates is very real today. First class mail 
volumes have been in decline for several years and the only way 
the Postal Service can legally respond to declining volumes and 
revenues right now is by raising rates even further. As rates 
go up, even more volume leaves the system, contributing to what 
David Walker, who testified at the panel's first hearing, and 
is the head of the GAO, has called a ``death spiral.''
    If we do nothing, the Postal Service will be defunct before 
we know it. I think the time is right for Congress to prevent 
this from happening. For the first time since the Nixon 
administration the White House has called for comprehensive 
postal reform. Our colleagues in the other body are as 
committed as we are to preventing the Postal Service from 
melting down. We also have the guidance of the President's 
Commission on the Postal Service, which did an extraordinary 
job in a very short amount of time. Last but not least, we can 
build on the 9 years of hard work that Chairman McHugh has 
devoted to this issue, and I might add, Chairman Burton before 
me. I look forward to working with him and the rest of our 
colleagues on the other side of the aisle as we confront this 
vital issue.
    Thank you.
    [The prepared statement of Chairman Tom Davis follows:]

    [GRAPHIC] [TIFF OMITTED] T3087.421
    
    Mr. McHugh. I thank the distinguished chairman for his kind 
comments and for his leadership on this issue.
    For those of you in the back who cannot see the next 
speaker, you can look right up there and see him. [Laughter.]
    That is not an exercise in ego. It is an exercise of the 
fact that he was the esteemed chairman of this full committee 
for the 6 years in which every Member is allowed if they are 
lucky enough, fortunate enough, hard-working enough, and good 
enough to reach that pinnacle. I will tell you that during my 
time previously as a subcommittee chairman and later as a 
special panel committee chairman, Dan Burton took this issue up 
and worked it to his fullest. You could not ask more of a full 
committee chairman than Mr. Burton to render unto this issue. 
So I am thrilled he asked, volunteered, aggressively pursued a 
position on this panel. It is a thrill for me to see him seated 
here today. I am honored to yield to him once more.
    Mr. Chairman.
    Mr. Burton. Thank you, Mr. Chairman. Would you send a copy 
of your remarks out to my district? I really would appreciate 
it. [Laughter.]
    I should look that good.
    Let me just make a couple of brief comments. I have a 
statement I would like to present for the record, Mr. Chairman. 
But one of the things that is very important, in addition to 
having the administration get on board in trying to get 
legislation passed which will help solve the problems of the 
Postal Service, is to get the interested parties involved in a 
positive way.
    Now, I do not mean to throw any rocks at anybody and I am 
not going to go into specifics, but there are certain 
organizations that have a vested interest in the Postal Service 
not doing as well as they should because they pick up market 
share. I think it is real important that this subcommittee and 
the chairman and the administration work very closely with 
these individuals to make sure that they are on board, because 
if they are not on board, then their employees will be lobbying 
their Congressmen and Senators against passage of legislation, 
and we will be in the same mess we are in now, 2 years from now 
and 4 years from now, and the situation will just get worse and 
worse.
    So it is extremely important that all interested parties be 
involved in a positive way in coming to a positive conclusion 
about this legislation. FedEx, Mr. Smith, has been with us for 
a long, long time in trying to solve this problem. I really 
appreciate that. I hope that your counterparts in your industry 
will likewise look at this in a very positive way so that we 
can get on with solving this problem.
    Ultimately, and I hope the industries that I am talking 
about realize that if the Postal Service goes belly up or 
becomes defunct down the road, it may in the long run look like 
it is going to be a positive for them, but it will not be. It 
will be a negative. So it is in the best interests of the 
private sector of this country, as well as the post office, to 
get together and solve this problem.
    With that, Mr. Chairman, I thank you very much for giving 
me this time.
    Mr. McHugh. I thank the gentleman. Without objection, his 
entire statement will be entered into the record.
    [The prepared statement of Hon. Dan Burton follows:]

    [GRAPHIC] [TIFF OMITTED] T3087.178
    
    [GRAPHIC] [TIFF OMITTED] T3087.179
    
    Mr. McHugh. The next gentleman who hosted us last week in 
the Windy City, the great city of Chicago, who as I mentioned 
in my opening remarks has been an ever-present and ever-
forceful individual in terms of this initiative, Mr. Davis, the 
gentleman from Chicago, from Illinois, and the ranking member 
on this panel as he was the ranking member on the subcommittee.
    Mr. Davis.
    Mr. Davis of Illinois. Thank you very much, Mr. Chairman. 
Let me apologize for being a bit late, but I have three 
hearings going on all at the same time. I have been trying to 
figure out how to do a double version of the Watusi, to go 
forward and go backward and you move. [Laughter.]
    Let me thank you for, first of all, coming to Chicago with 
the hearing last week. All of us in the Midwest were pleased 
and delighted that we had the opportunity for a discussion in 
the greatest city in the country, with all due respect to all 
others.
    But I am pleased to join with you in convening this 
hearing, and welcoming our witnesses today. This is the third 
of a series of hearings being held by the Special Panel on 
Postal Reform and Oversight. It is my understanding that a 
final wrap-up here will be held with the Senate Governmental 
Affairs Committee next month.
    Last week, we heard from the postal employee unions and 
management organizations. The message was clear and resounding: 
collective bargaining has worked and worked well. Today, we 
will hear from postal business-reliant companies. To that end, 
I would like to give a special welcome to Mr. William Davis, 
chairman, president and CEO of R.R. Donnelley. Of course, R.R. 
Donnelley is a Chicago-based printing and logistics company 
located in my district. Mr. Davis' corporate and civic 
leadership has been outstanding.
    I would also like to recognize Capital One and Pitney 
Bowes. Pitney Bowes and R.R. Donnelley were both in attendance 
at an advisory group meeting I held in Chicago last week, prior 
to the field hearing. In reviewing the testimony, I was pleased 
to note that we seem to agree on many, many of the important 
issues. We need and must protect universal service. The Postal 
Service needs flexibility to set rates and provide rate 
stability, and the Postal Service must not bear the military 
service payment obligation.
    As my colleagues and I continue to work together to craft 
responsible postal reform legislation, I would like to commend 
our panelists for taking the time to be engaged and provide 
input into the process. Your support of our efforts is critical 
if we are to be successful in passing postal reform 
legislation. I only ask that you stay the course with us and 
stay engaged.
    Again, Mr. Chairman, I want to thank you for your 
leadership, welcome our panelists, and look forward to all of 
our participation as we continue one of the great traditions of 
this country, and that is the ability to communicate from 
border to border at a cost that is possible for people to pay.
    Mr. McHugh. Again, I thank the gentleman for his 
leadership.
    Next, I would be pleased to yield to one of the newer 
Members of the House, one of the newer members certainly to 
this panel because it is a new panel--we are all newer members 
of the panel--but the gentlelady, again, like everyone else on 
the panel, sought membership and who was very, very concerned 
about that. The gentlelady from Michigan, Ms. Miller.
    Ms. Miller. Thank you, Mr. Chairman. Certainly, your 
commitment to postal reform and creating a successful Postal 
Service is very much appreciated. I would also like to thank 
Chairman Tom Davis for his commitment to this issue, and 
certainly for allowing me the opportunity to serve on this 
panel as well.
    I think with all the issues facing the Government Reform 
Committee, there are few that are more important than postal 
reform. I am pleased to be given the opportunity to help make a 
substantial change for the better. The Postal Service has not 
been subject to significant reform since its inception over 30 
years ago. Its current business model is certainly not adequate 
for the 21st century, and we can do better. We need to do 
better.
    Prior to coming to Washington, before I got this job, I was 
a township supervisor. I was a county treasurer. I was the 
Secretary of State in Michigan. All of these jobs were very 
administrative in nature, but each of them had a similar theme 
for me, and that was reform of an antiquated agency. So in each 
of my positions, my office conducted an expansive operational 
audit, initiated reform that resulted in more cost-effective 
practices, and certainly more efficient ways of doing business.
    I think this same attitude seems to be certainly 
transferred to the Federal Government and so many of its 
agencies. Customer service needs to be a goal of each and every 
postal employee because when this kind of an attitude is 
combined with an effective business model, the customer is 
better served and business can actually expand.
    The establishment of postal rates also have to be customer 
service oriented. If rates are unnecessarily high due to waste 
or inefficiencies, then such a situation would amount to really 
nothing less than a tax on citizens and businesses in our 
Nation as well. Certainly the witnesses before us today 
represent some of the Postal Service's biggest customers, and 
they need the predictability as they construct their own 
business models.
    At the State level of government, we were always forced to 
make a business case for the reforms that we put forward. By 
law, the Postal Service is required to fund its own operations, 
but bureaucracy and inefficiencies sometimes can rule with an 
iron fist. This is a problem, and the President's criteria for 
reform will certainly help us as lawmakers cut through some of 
the red tape and remove unnecessary hurdles.
    Postal reform is a challenge, but it is also an opportunity 
to change a government entity for the better through 
transparency, flexibility, and accountability, the Postal 
Service can be successful.
    Again Mr. Chairman, I want to thank you for holding this 
hearing today. I am very confident that each of the witnesses 
today will provide this panel with information that will allow 
us to help the Postal Service become a success well into the 
21st century. I look forward to working with you and all the 
members of this panel to draft legislation to that end. Thank 
you.
    Mr. McHugh. I appreciate the gentlelady's presence and her 
interest and hard work on the committee.
    Next, a fellow New Yorker who has dual zip code 
residencies, both in the greater New York area and also in the 
even greater New York area of Blue Mountain Lake in my 
district, Mrs. Maloney.
    Mrs. Maloney. I would like to thank Chairman McHugh from 
the great State of New York for all of his efforts, along with 
Ranking Member Danny Davis, who is the founder of the Postal 
Caucus, as well as Chairman Tom Davis and Ranking Member 
Waxman.
    I would also like to really thank all of the industry 
representatives today, and a very special welcome to one of my 
constituents, Ann Moore, who happens to be chairwoman and chief 
executive officer of Time Inc. We are very proud that you are 
here today. I believe she is the first woman to hold this 
important position and that is an important role model to women 
in general. I know how active she has been in the PTA and the 
civic fabric of our city, so we appreciate that.
    We are here today to review the Commission's 
recommendations, but I do want to note that the Postal Service 
is the second largest civilian employer in the Nation, 
employing well over 800,000 talented and dedicated workers. The 
mail industry is 8 percent of our GDP, a $900 billion industry 
that includes not only the Postal Service, but also 9 million 
individuals in the private sector.
    I also have the honor of representing a large part of the 
magazine industry, which is enormously important both to the 
economy of New York, and I would say, the entire country. These 
are not jobs that go overseas. These are highly paid jobs that 
are important to our economy. I mentioned that I just came from 
a hearing with Chairman Greenspan from the Federal Reserve. We 
were talking about the 3 million jobs lost in the past 3 years. 
So maintaining jobs in our country is a very important social 
goal.
    I do want to note that as much as we appreciate magazines, 
they entertain us, they educate us, but because of the 
escalating cost of the mail, a number of magazines in the 
district that I represent have folded: Mademoiselle, one that I 
used to read in my youth, Mode, Brill's Content, and Industry 
Standard. These are magazines that contacted me. There may have 
been more that folded, but these are several magazines that 
folded in the recent 3 years. The reason that they gave was the 
escalating cost. So by keeping postal rates affordable, 
publishers, individuals and industries can continue to use the 
Postal Service, whether it is to send a letter to a friend or a 
magazine.
    Today, we have the opportunity to hear the responses we 
have heard in two former hearings, their response to the 
Commission's recommendations, and to hear how the postal reform 
recommendations will affect their businesses, and very 
importantly, their ability to employ citizens in our 
communities. So I look forward to the hearings, and again I 
congratulate particularly Chairman McHugh and Danny Davis. This 
is an issue they have worked on for at least 5 years, so I hope 
we can come to a conclusion this year.
    Thank you very much.
    Mr. McHugh. I thank the gentlelady for her hard work.
    Next, the gentleman from Pennsylvania, who again asked 
voluntarily to be on this special panel. We deeply appreciate 
that. It demonstrates his concern and his devotion to the 
issue, Mr. Murphy.
    Mr. Murphy. Thank you, Mr. Chairman. I appreciate the 
opportunity to be here today and to serve on this panel.
    There is no better time than the present to thoroughly 
examine the health and viability of the U.S. Postal Service. It 
has been said many times by both members of this panel as well 
as other witnesses testifying before it, but it bears 
repeating, that if the Postal Service is to continue to serve 
the public in the future as ably as it has in the past, changes 
must be made.
    The Postal Service and the private mailing industry, postal 
employees and the public, cannot afford to wait any longer for 
meaningful action to be taken. I want to commend the President 
for taking the initiative and highlighting the pressing need 
for postal reform by establishing the President's Commission on 
the Postal Service, as well as thank this panel.
    I need to offer thanks to the many workers of the U.S. 
Postal Service who have themselves offered ideas from the 
inside to improve efficiency, reduce waste, and enhance 
consumer services. I am looking forward to hearing testimony 
today, particularly from Mr. Smith, as you may know, Dan 
Sullivan, the president and CEO of FedEx Ground who really is 
the reason why you are so successful. [Laughter.]
    I hope he reminds you of that daily. He did not pay me to 
say that today. [Laughter.]
    It is extremely helpful for me to hear from those who are 
involved with private delivery, as well as those who are 
involved with the Postal Service, to hear ideas come from the 
inside. I certainly encourage all services to continue to get 
us that kind of information, which helps us make the best of 
good organizations.
    Thank you, Mr. Chairman.
    Mr. McHugh. I thank the gentleman.
    Next, another New Yorker. You can never have too many New 
Yorkers, the gentleman from the great city of New York, my good 
friend, Ed Towns. Mr. Towns.
    Mr. Towns. Thank you very much, Mr. Chairman. Let me thank 
you for holding this hearing. This is our third hearing. This 
has been an informative process, and Subcommittee Chairman 
McHugh and also Mr. Davis should be really commended for their 
hard work. I salute you for it.
    I would also like to recognize one of our witnesses here 
today.
    Mr. McHugh. Because he always says so many important 
things, the audience is expressing an interest, they cannot 
hear you. Could you swing that mic closer?
    Mr. Towns. Can they hear me? That's a new one.
    Mr. McHugh. Yes, it is. [Laughter.]
    Mr. Towns. Thank you, anyway. [Laughter.]
    Mr. McHugh. You can repeat the nice things you said about 
me. I don't care about the rest of it. [Laughter.]
    Mr. Towns. I would also like to thank, of course, Ann 
Moore, the chairman and CEO of Time Inc. Carolyn Maloney, my 
colleague, said some nice things about her and claimed her, but 
her daughter goes to school in her district, but she actually 
lives in my area, so I want you to know that. I want to make 
that distinction. She is Kings County. [Laughter.]
    It is always good to have someone from Kings County appear 
before this committee. You are always welcome. I want you to 
know that. I have to make certain that I top Carolyn Maloney. 
[Laughter.]
    Though it has been widely reported and often repeated about 
the fact that we must reform, I do not want to lose track here 
about what we are supposed to be doing because reform is 
neither positive or negative. We want to talk about some 
positive kind of reforms. When you say ``reform,'' you have to 
tell us what you are going to do. When we hear ``reform'' 
around here, we get all excited.
    What I have learned over the years that I have been around 
is that when you say ``reform'' around here, that means cut 
your budget. We do not want to be involved in that. It is like 
my dad used to tell my brother and I about prayer. He said, 
``Son, if somebody says they are going to pray for you, you 
need to try and find out what they are going to say.'' 
[Laughter.]
    He said, ``the prayer is neither positive or negative. They 
might pray that they break your neck.'' So we have to make 
certain that the changes that we make here are positive, 
because I think that is more important than anything else, just 
not to reform, but to make certain that we reform in a positive 
kind of way.
    So far there seems to be nearly unanimous agreement on some 
of the issues. We all agree that outstanding issues related to 
the escrow must be resolved quickly so those funds can be used 
to address long-term liabilities like retiree health care and 
capital improvements.
    There is also widespread agreement that the Treasury 
Department should take responsibility on military pensions. 
That is something that I think should happen. This position has 
been adopted by the Presidential Commission, members of both 
sides of the committee, union representatives, and according to 
our witnesses' testimony, they also agreed with it as well, by 
the mailing industry as well.
    The only stakeholder not to adopt this position so far has 
been the administration. Given such support from a diverse 
array of interests, I hope that the administration understands 
that there is no negotiation on this point. This is a point 
that we will not back off of. As one union official noted, the 
Postal Service will not be a cash cow to reduce the deficit.
    But beyond these issues, some divisions have emerged. On 
paper, the objectives set out by the Commission seem reasonable 
and fair. Just like any nonprofit organization or business, why 
would we not want to implement the best practices in postal 
operations?
    Additionally, as a public institution, it would seem to 
make sense that Postal Service operations are transparent and 
accountable. The difficulty arises when we have to translate 
these principles into actual legislative language. Given the 
slow and steady drumbeat of consensus that is beginning to 
emerge on these issues, I remain hopeful that we will be able 
to reach consensus on some of these difficult issues.
    The long-term viability of the Postal Service and its 
workers, our constituents, and the millions of employees in the 
mailing industry depend on us. We must not let them down. I 
look forward to hearing today from the witnesses on why they 
believe these reforms are critical and why we need to act on 
these changes now.
    Thank you, Mr. Chairman. On that note, I yield back.
    Mr. McHugh. I thank the gentleman, and I listen to his 
words very carefully. He should listen to mine. Depending on 
how he votes, I will pray for you. [Laughter.]
    Next, I am honored to yield to the gentlelady who, again as 
we all have, volunteered to be on this panel, the gentlelady 
who helped with chairing one of our hearings and has done a 
great job, from Tennessee, Mrs. Blackburn.
    Mrs. Blackburn. Thank you, Mr. Chairman. I will be very 
brief, and look forward to hearing from our panelists.
    I want to thank each and every one of you for taking your 
time to be here today. I especially would like to extend a 
welcome to Mr. Smith. And it is always a pleasure to see 
someone from Tennessee and from our district, Mr. Critelli, who 
has many employees that are in our district and are 
constituents. We welcome you. We look forward to hearing from 
you, and also learning from you lessons learned, best practices 
that we are looking forward to seeing implemented in the Postal 
Service as we address the need for reform and equipping the 
Postal Service for 21st century delivery of service. We thank 
you and we appreciate your contribution.
    Mr. McHugh. I thank the gentlelady.
    Next, a gentleman who cares enough about this issue to even 
in the month of February, no offense, Mr. Ranking Member, Mr. 
Davis made the journey from Virginia to Chicago. I will allow 
you to make the judgment as to what kind of devotion that shows 
on an issue.
    Mr. Schrock.
    Mr. Schrock. Thank you, Mr. Chairman.
    When Danny Davis promises if you come to Chicago he will 
give you good weather in January or February, please beware. 
[Laughter.]
    You know, ``fool me once, shame on him; fool me twice, 
shame on me.'' But I must admit, I have not been involved in 
this postal issue as long as people like the chairman and the 
ranking member and other members, but like so many here, I 
volunteered. I asked to be on this panel because of the great 
impact the Postal Service has on our economy and every single 
American.
    The Postal Service would fail if it were not for its 
largest customers that we see sitting here today, and their 
input on the future direction of the Postal Service is of 
utmost importance. I am glad to have those leaders here to talk 
about those customers today. I have read all your testimony and 
I look forward to hearing that and then asking questions at the 
end.
    Thank you, Mr. Chairman.
    Mr. McHugh. I thank the gentleman. Again, I have found, 
where I am from, the weather in Chicago is wonderful. 
[Laughter.]
    But it was really great that you made the effort to be 
there. We deeply appreciate it.
    Next, a gentleman, and last I believe, only by order of 
congressional procedures, a gentleman who is not a member of 
this panel, but who has previously been a member of the full 
subcommittee. I will tell you from our personal conversations, 
he is one of the most interested and concerned members on this 
issue, the gentleman from Connecticut, Mr. Shays, who wanted to 
be here and particularly make a statement about one of our 
panel witnesses, who has a somewhat passing interest in the 
great State of Connecticut.
    Mr. Shays.
    Mr. Shays. Thank you, Mr. Chairman.
    Mr. Chairman, not being a freshman, I certainly did not 
volunteer for this committee, having had the opportunity to do 
some of this work in the past.
    I am here, frankly, to thank those who have volunteered, 
and to thank you, Mr. Chairman, and Danny Davis and our ranking 
member, and in particular the chairman of the full committee, 
Tom Davis. This is a hugely important issue. I think it speaks 
volumes that we have such a distinguished group of panelists.
    I do not intend to ask questions, but I do intend to stay 
for the first round of statements from all of our panelists. I 
want to thank them, each and every one, for being here. I do 
want to particularly thank Michael Critelli. He has been 
laboring on this issue for an extraordinarily long time and has 
sought to make this bipartisan. Frankly, that is the only way 
it is going to succeed, and not just management, but with 
unions as well. Michael, I just thank you for what you have 
done.
    I also want to say something else to this full committee 
and to the audience here as well. Pitney Bowes made a decision 
in Stamford, CT, which is a corporate mecca, frankly, of the 
United States, in my judgment, to move some of its operations 
to the old industrial city of Bridgeport, which I also 
represent. He did it without any fanfare. He just knew it 
needed to happen. He could have moved some of these folks to 
suburban areas. For that, as well, Michael, I just thank you 
for what your company is doing. It speaks volumes for who you 
are, but it also speaks volumes for the commitment of your 
wonderful company to the well-being of our country and to the 
district that you are in.
    Thank you for allowing me that opportunity. I will, as 
recompense, stay for all the statements since I have been 
allowed to make a statement.
    Thank you.
    Mr. McHugh. I thank the gentleman for being here and for 
his leadership on this full committee, and his deep concern on 
this issue.
    It is now time for me to have the honor of introducing our 
witnesses. I can assure the audience that these captains of 
industry are not entirely accustomed to sitting for as long 
they patiently have listening to a bunch of politicians make 
statements. No American should have to go through that. 
[Laughter.]
    But they did, and I am deeply appreciative for it. I want 
to introduce them to you.
    These are partners in our effort at postal reform. If you 
look at the interests that they represent, it is a remarkable 
one and one that perhaps some would argue places their 
corporate interest behind the national interest. That is about 
as high a praise as I think anyone could assess to any 
individual.
    The gentleman from Connecticut just introduced Mr. Mike 
Critelli from Pitney Bowes. You heard about his interest in the 
State of Connecticut, but they have long been a partner in this 
initiative. He has done yeoman's work in creating the Mailing 
Industry CEO's Council, which has been instrumental in trying 
to move forward this issue. Ms. Ann Moore, I don't know where 
she lives, I don't know where she works other than New York, 
and that is all I care about, but obviously Time Inc. is a true 
giant, not just on the corporate scene in the United States, 
but on the world stage. We are deeply honored to have her here 
today.
    Bill Davis from R.R. Donnelley, from the great city of 
Chicago. Mr. Davis and his company were one of the earliest 
partners with this original subcommittee and now panel, in 
trying to move in this area. We are deeply, deeply appreciative 
of his efforts.
    Mr. Nigel Morris of Capital One. Mr. Morris represents a 
company that has enormous financial interest in the U.S. 
economy, in the world economy. His recognition of this interest 
as one of great importance is demonstrated in his presence here 
today. We are deeply appreciative of that.
    In particular, I want to especially welcome and thank Fred 
Smith from Federal Express. Fred has been a steadfast partner, 
a supporter throughout our most early efforts at postal reform 
in the mid- and late-1990's. And as he has done here today, 
when you have a chance to hear his testimony, and I hope you 
get a chance to read his full statement, has provided 
constructive, honest, credible, reasonable recommendations. He 
is a competitor of the Postal Service. This is a gentleman who 
started a company from nothing; who has become an enormous 
example of what the American opportunity can present to people 
with initiative and the willingness to work hard, and who still 
at the end of the day as a U.S. citizen recognizes the 
importance of a viable Postal Service. Fred, a particular 
welcome and thanks to you.
    I would state, and I have always felt it was somewhat of an 
anomaly, that Members of Congress should take the oath of 
telling the truth, but our committee policy is that all 
witnesses should be sworn in prior to their testimony. So if 
you would please all rise and raise your right hands and answer 
the following question.
    [Witnesses sworn.]
    Mr. McHugh. And they have so answered in the affirmative.
    I am going to ask the witnesses to present their testimony 
based on the list that I have in front of me. I think it 
generally goes from our left to the audience's right. Note that 
without objection, all of your written testimonies will be 
entered in their entirety to the record. Without objection, so 
ordered.
    With that, to the extent it is possible, we are not going 
to run red lights on you, but clearly your time is probably far 
more valuable than ours, if you could try to summarize your 
comments, it would be greatly appreciated.
    With that, Fred Smith, chairman and chief executive officer 
of FedEx, Federal Express. Fred.

STATEMENTS OF FRED SMITH, CHAIRMAN AND CHIEF EXECUTIVE OFFICER, 
 FEDEX; ANN MOORE, CHAIRMAN AND CHIEF EXECUTIVE OFFICER, TIME, 
 INC.; MICHAEL CRITELLI, CHAIRMAN AND CHIEF EXECUTIVE OFFICER, 
  PITNEY BOWES; WILLIAM DAVIS, PRESIDENT AND CHIEF EXECUTIVE 
 OFFICER, R.R. DONNELLEY & SONS; AND NIGEL MORRIS, CO-FOUNDER 
                 AND VICE CHAIRMAN, CAPITAL ONE

    Mr. Smith. Thank you very much, Mr. Chairman. As you 
suggested, I will submit our testimony for the record and just 
summarize it.
    On behalf of hundreds of thousands of FedEx shareowners and 
over 220,000 FedEx employees in the United States, we 
appreciate the opportunity to comment on this important 
initiative. As you noted, we do support USPS transformation and 
modernization so it can survive and prosper. We have supported 
reform legislation which you championed in previous Congresses. 
We will submit detailed comments on a new bill when it is 
ready.
    FedEx is no stranger to the requirement to modernize and 
meet market conditions. As Mr. Murphy mentioned a moment ago, 
we have become a major player in the ground parcel business, in 
the freight business. We have become an enormous presence in 
the international trade of the United States and the world. All 
during those diversifications and new initiatives, our domestic 
express business has declined in the sector that can be 
transmitted electronically.
    So we have seen this as a company, and we have seen it 
observing the Postal Service and industry and technological 
development, and as a supplier to the Postal Service. So we 
strongly believe that the Postal Service must transform. We are 
in the midst of a truly unprecedented phase of the Information 
Revolution, with the Internet and the other remarkable 
technologies as Chairman Davis mentioned at the onset. To 
properly transform, we feel that the USPS needs flexibility and 
incentives. General Potter has testified to this committee 
quite succinctly that his management needs the flexibility to 
manage the business. The right incentives to managing any 
business are critical, whether it is FedEx or the USPS or any 
other enterprise.
    Certainly, the obstacle is not a lack of good people at the 
USPS. We have been uniformly impressed with the quality of the 
folks that we deal with at USPS and their executives in 
particular. But quite frankly, we could not have transformed 
and become a $25 billion business had we had the same 
restrictions and disincentives of a monopoly that currently 
shackle the Postal Service.
    The Presidential Commission, as was noted a moment ago, 
recommended that the best practices of the private sector be 
applied to the USPS. Again, that means flexibility and 
incentives. The Postal Service regulatory regime needs to 
transform, and we support the guarantee of universal postal 
service, and at the same time appropriate restrictions on 
cross-subsidy and unfair competition where the Postal Service 
competes with private companies.
    The key to this regulatory transformation is to have 
separate management and governance. Congress should set the 
scope of the universal service that you desire, and then the 
appointed regulator should enforce that scope. The regulator 
should set the monopoly at a level that is at a minimum needed 
to fund universal service, and this should be an economic and 
not a political question. The regulator should set price caps 
for non-competitive products.
    On the other hand, the management of the USPS, in our 
opinion, should set the wages, other input costs, manage 
retained earnings, and so forth. The regulator should then set 
public policy objectives for the USPS management to manage 
against.
    We strongly believe that regulatory transformation can 
result in better universal service and appropriate controls on 
unfair competition that are better than the current law. FedEx 
also supports the USPS on some of the issues that have been 
discussed today: military pensions, the matter of the escrow 
account and so forth.
    In short, we think that the USPS at the end of the day in 
this legislative process should end up being a much more 
business-like enterprise with less political agendas, with the 
USPS board empowered to oversee an appropriate transformation.
    Thank you very much, Mr. Chairman.
    [The prepared statement of Mr. Smith follows:]

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    Mr. McHugh. I thank the gentleman, again, deeply appreciate 
his courage and his leadership on this issue.
    I would say to the panel, I apologize. You can hear. We 
have at least one, perhaps two votes. If you could please bear 
with us and smoke them if you have them, and we will return as 
soon as we can.
    With that, we stand in adjournment.
    [Recess.]
    Mr. Davis of Virginia. The meeting will reconvene. We are 
coming back. We have Ms. Ann Moore, the chairman and chief 
executive officer of Time Inc. as our next witness. Ann, thanks 
for bearing with us. It is just a pleasure to have you here 
today.
    Ms. Moore. Thank you, Chairman McHugh, Ranking Member 
Davis, Chairman Davis, Congressman Waxman and members of the 
panel, for this opportunity to discuss the crucial issue of 
reforming the U.S. Postal Service.
    As you have heard, I am Ann Moore, the chairman and CEO of 
Time Inc. We are the world's largest magazine publisher, with 
134 magazines including Time, People, Sports Illustrated, and 
Fortune. I have been involved with postal reform issues for a 
long, long time, almost as long as Chairman McHugh. I, like 
Congressman Schrock, volunteered to work on this back when I 
was president of People.
    There is no issue more critical to the magazine business 
and to magazine readers than the future viability of the postal 
system. The great majority of our readers depend upon the 
postal system to deliver their magazines. We need to work 
together, obviously, to ensure that this can continue over the 
long term. It affects everybody from the mom who reads 
Parenting to the sports fan who reads Sports Illustrated.
    The core value of the post office has always been reliable, 
affordable delivery of the mail to every American home. We know 
that Congress wants to maintain this goal. We have a tremendous 
opportunity to pass meaningful, comprehensive legislation at 
this time, and we are all committed to working with you to get 
it done.
    The current Postal Service business model, as we have all 
heard this morning, is not sustainable in a climate of 
expanding addresses and declining mail volume. We really 
applaud the efforts of Jack Potter to reduce Postal Service 
costs. But reducing costs alone will not solve the problem. 
Really broad and sweeping change is required.
    President Bush and the Treasury deserve thanks for creating 
the Presidential Commission to help address these issues, and 
we do support the report's five core principles. However, it is 
also crucial that a rational rate cap system be put in place by 
Congress. The dramatic rate increases we have seen are simply 
not acceptable. As a result of rate increases in recent years, 
postage expenses have become our single biggest line item at 
Time Inc. This year we will spend more than $500 million on 
postage.
    This surprises people, but we actually spend more on 
postage than we do on paper or printing. We spend more on 
postage I think than any other company in America. So we are 
acutely aware that postage costs have been going up at a rate 
that far exceeds the rate of inflation. These statistics are 
documented in our written testimony, but in 2001 and 2002, we 
experienced three rate increases within an 18-month period. If 
you go back to 1986, magazine postage costs have gone up by 220 
percent, nearly double the rate of inflation.
    From our own experience, we know that these rising postal 
costs drive mail volume out of the system, which compounds 
their problem. Today's rate system fails to provide the Postal 
Service with strong incentives to hold down costs. It also 
fails to provide mailers with predictable rates. That is why 
Congress needs to institute a rational rate cap system. Give us 
predictable rates and we will give the Postal Service more 
volume, from our current magazines to all the new ones I would 
like to launch. We have many creative ideas on the drawing 
board, magazines that consumers tell us they want. But if I 
cannot predict the future costs of mail and the long-term cost 
of a new launch, I am not able to launch. I do not need to tell 
you that ventures like new magazines create jobs. We have only 
15,000 employees at Time Inc., but if you count all the 
suppliers that depend on us, from the paper mills to the 
printers to the mail houses, we are part of the 9 million 
workers who are part of our mailing industry. A little-known 
fact is that one subscription, by the way, to a weekly magazine 
can generate over 90 pieces of mail. That is real growth and 
that is what the Postal Service needs.
    For all of these reasons, it is crucial that rates be 
capped to an inflation benchmark and that rates be based on 
cost, kind of a pay for what you use. It is a good business 
principle. Of course, price caps must not be met at the expense 
of service. Any reform bill must include service measurement 
systems and delivery standards for all classes of mail.
    Before I conclude, I want to also comment on last year's 
CSRS legislation. This bill provided much-needed relief for the 
mailing industry, and I want to thank each of you for getting 
it passed. That said, the bill as we all know included two 
problem items that need to be addressed. First, the bill's 
escrow provision, which forces mailers to pay an additional $4 
billion in 2006. This item alone will add another 5.4 percent 
increase to our postage rates. And second, the CSRS bill also 
shifts the $27 billion in military retirement costs from the 
Treasury to the postal system. Since 90 percent of those costs 
date back to before the establishment of the postal system in 
1971, we support transferring that back.
    So in summary, Time Inc. believes that the issues 
challenging the post office are urgent, and they really require 
bold action by Congress. So we need only three things: 
predictable rate increases that do not exceed the rate of 
inflation, a rate cap system; resolution of CSRS escrow and the 
retirement issues; and finally, service standards for all 
classes of mail.
    I am personally committed to working with you and all 
interested parties to help implement urgently needed postal 
reform. I just want to thank you again, Mr. Chairman, for this 
opportunity to share the views of Time Inc. with this special 
panel.
    [The prepared statement of Ms. Moore follows:]

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    Mr. McHugh. I thank the gentlelady for her interest, her 
support, and obviously for her patience and effort to be here 
today.
    Next, as I mentioned, I hope, in my opening statements, a 
gentleman who represents an organization and who is a gentleman 
who has been involved in this initiative over the long haul, 
for which we are deeply appreciative, Mr. Michael Critelli, 
chairman and chief executive officer of Pitney Bowes.
    Mr. Critelli.
    Mr. Critelli. Thank you very much, Chairman McHugh. I 
appreciate the opportunity to testify today, and I also 
appreciate the kind remarks that you and many members of the 
panel made about me and my fellow CEOs that have worked on 
postal reform.
    Pitney Bowes is vitally interested in postal reform. Let me 
give you a few facts. We automate mail processing for mailers 
of all sizes. We have over 1.3 million such mailers in the 
United States alone. Metered mail, which we invented, is almost 
one-half of all first class mail, and we collect approximately 
one-third of all Postal Service revenue. We are the leading 
manager of corporate and government mail rooms, and we now own 
the Nation's largest pre-sort business.
    More than 90 percent of the mail stream today is sent to or 
from businesses, governments and nonprofits, and much of it is 
generated by known mailers who typically use meters or permits 
for postage. They do much of the work preparing the mail by 
sorting it, applying bar codes and presenting the mail at 
designated postal facilities. Our vision of postal commerce 
includes the Postal Service as a booster of economic growth, 
not a drain on public resources.
    We at Pitney Bowes and the members of the Mailing Industry 
CEO Council believe that postal reform legislation needs to get 
done now. Chairman McHugh, you and this committee have led this 
reform effort for quite a while, and last year the President's 
Commission and now the administration have joined your efforts 
to call for enactment of legislation. I am here to pledge today 
that the members of the CEO Council and I stand ready to assist 
you in any way possible.
    I want to highlight briefly five essential elements of 
postal reform legislation. First, the mission of the Postal 
Service is clearly to maintain universal access and universal 
delivery of physical mail at affordable rates, but it must 
focus its core physical mail business on growing the mail. More 
mail means more jobs within the Postal Service, the mailing 
industry, and other mailers who depend on mail to help them 
grow. We also believe that the Postal Service should remain a 
public entity, but implement best practices and right-size the 
postal network and the work force through attrition 
opportunities.
    Second, legislation should enhance private sector 
partnerships for the most cost-effective postal system. For 
example, if work-sharing discounts can drive lower cost, while 
requiring partners to meet the Postal Service's quality 
standards, the public, the Postal Service, and the mailing 
industry will all benefit. These discounts could be for 
reducing or eliminating costs of mail preparation, payment 
evidencing, collections, sorting, addressing, or 
transportation.
    Third, the legislation should encourage the Postal Service 
to embrace technology. The heart of this vision is to encourage 
mailers to create machine-readable mail to uniquely marked mail 
pieces with sender, recipient and other information, and to use 
available technologies for the highest address quality 
possible. Bad addresses alone cost the Postal Service over $1.5 
billion a year, and mailers several times that. Intelligent 
mail, as referenced in the Presidential Commission report, is 
more valuable to the sender because it allows coordination with 
other services based on when a piece of mail is received. It 
reduces postal costs, helps the Service manage its workload and 
it improves mail security because it is traceable. Those who 
use the mail for terrorism do so anonymously in order to evade 
detection.
    Fourth, postal reform legislation should maintain price 
stability, while increasing pricing flexibility. Postal rates 
should not increase faster than the rate of inflation, and 
productivity should enable rate increases to be constrained 
below the rate of inflation. Subject to these caps, pricing 
flexibility is also important, including negotiated service 
agreements. We believe the Postal Service should be able to 
pursue dynamic pricing to change postal rates by month, day or 
even time of day, much like telephone companies or hotels, to 
promote increased use of mail.
    Fifth and finally, the principle is to improve the Postal 
Service's tools, to manage its employees and its business. The 
Postal Service should be judged by sound business metrics 
across all product lines. Performance measures should be based 
on careful and comprehensive cost accounting and a governing 
board should be organized around and designed to function in 
accordance with best practices for financial transparency.
    We recognize postal reform is a big job and it will not be 
solved overnight, but reform legislation in this Congress is 
essential. We also support congressional action approving the 
use of CSRS savings currently held in escrow and returning 
responsibility for funding Civil Service retirement system 
pension benefits related to the military service of Postal 
Service retirees back to the Department of the Treasury.
    Thank you all very much. I again appreciate the opportunity 
to present today.
    [The prepared statement of Mr. Critelli follows:]

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    Mr. McHugh. Thank you very much, Mr. Critelli. Again, I 
deeply appreciate your leadership and involvement on this.
    Next, Mr. William Davis, who is president and chief 
executive officer of R.R. Donnelley, a proud company of 
Chicago, IL, and more importantly from the perspective of this 
hearing, an individual and a firm that has been deeply involved 
in this issue from virtually the first day, at least in so far 
as my perspective is concerned.
    Bill, thanks for being here. Our attention is yours.
    Mr. William Davis. Thank you, Mr. Chairman, and my 
particular thanks to my Chicago neighbor and soulmate, Danny 
Davis, for everything and for your kind comments a few minutes 
ago.
    Good afternoon, I am Bill Davis, chairman, president and 
CEO of R.R. Donnelley. I sit before you today as a founding 
member of the Mailing Industry CEO Council and as a member of 
the U.S. Postal Service's Mailing Industry Task Force, and then 
finally as CEO of the largest commercial printer in the United 
States and one of the largest users of the U.S. postal system. 
R.R. Donnelley fundamentally supports the recommendations of 
the President's Commission and we urge Congress to push ahead 
right now, right now, with changes that will ensure that we in 
fact have a healthy, viable and affordable mail channel for the 
future.
    Change is essential to the health of the U.S. mailing 
industry. I know you have heard the numbers before. I have to 
repeat them quickly. This is a $900 billion industry. There are 
9 million jobs at stake, only a small percentage of them 
actually in USPS. That is not quite 9 percent of our GDP. That 
is the reason why I am here today. This is so much more than 
reforming the U.S. postal system. This is about our economy. 
This is about our jobs. This is about our future. We need to 
keep that in perspective throughout our joint efforts on this 
transformation. The total postal system as it stands today is 
inefficient. The President's Commission recognized these 
inefficiencies and now recommends major changes. I hope you 
will agree with the President's Commission and me, and I have 
heard this already today, you do agree that there is 
substantial potential for improvement.
    However, any piece of legislation that simply protects the 
status quo is not going to be acceptable. At its heart, the 
governance concept of the USPS must change. It must change to 
allow, encourage and, in fact, demand continuous, ongoing 
improvement. By doing so, the USPS will function more like a 
business. With my limited time, I would like to focus on two of 
these areas. One is worksharing, the other, network 
optimization.
    In today's world where technology is constantly changing to 
allow for new improvements, companies cannot and should not try 
to do everything themselves. It is impossible for any company 
to keep up with all that change. As a result, we have all 
learned to rely on others and their expertise in emerging 
capabilities in order to maximize our company's performance. 
Frankly, the USPS does not do enough of this. It tries to do 
too much itself. The USPS should focus on its core competency, 
universal service, the ubiquitous presence of that local mail 
carrier that is delivering to every one of us 6 days a week.
    Universal service has become an integral part of the 
economic and social fiber of our country. Now, worksharing can 
better allow the USPS to focus on this core competency, and at 
the same time drive down costs substantially. In fact, back in 
1999, the GAO did a study and showed that the limited amount of 
worksharing that had already occurred has saved the USPS an 
estimated $15 billion to $17 billion. Yet it is as difficult 
today to enter into a worksharing agreement with the Postal 
Service as ever before. Let me give you a recent example.
    At R.R. Donnelley, we and other printers recently reached 
an agreement with the USPS on something called co-
palletization. It took us 18 months to get this done--18 
months. And what did we get? We got a 3-year trial. If I were 
doing this same deal with any private company in America it 
would take 6 to 8 weeks. And if it didn't work we would undo 
it. We should not have to work this hard to persuade our 
partner to reach a result that benefits everybody: our 
customers, the Postal Service, us, all users of the system.
    The second area I would like to talk about is network 
optimization. Frankly, it is inconceivable to me that the USPS 
network is not making adjustments constantly. Facility 
locations, facility size, transportation routing should be 
changing all the time to keep up with demand, to eliminate 
redundancy, to eliminate overcapacity, to achieve productivity 
gains. All businesses need to adjust to changes in customer 
traffic, demographics, or other factors, especially service 
businesses like the USPS.
    The USPS must be given the flexibility to make these types 
of changes on an ongoing basis and frankly, politics should not 
get in the way. As a businessperson I am constantly faced with 
these hard decisions, closing some facilities, consolidating 
others, as well as having to outsource non-core functions. I do 
not mean outsource to India; I mean outsource to FedEx, non-
core functions, so we can best focus on our customers and on 
what Ann Moore and her counterparts expect from us.
    I can tell you that closing a facility is one of the 
hardest things I ever have to do. It is not fun. But I can also 
tell you that because we do this when needed, we are a 
stronger, better company. In the long run, it was the right 
thing to do. The USPS must be granted that same kind of 
flexibility to make these tough decisions. Furthermore, they 
must be allowed to make them. Utilizing worksharing and network 
optimization makes it possible to achieve the lowest combined 
cost, and that is at the core of what R.R. Donnelley and our 
customers expect from the USPS, which as Ann Moore pointed out, 
is an extremely critical component of the business models that 
we support.
    Finally, a short word on parcels. Any effort that will 
limit the ability or effectiveness of the letter carrier will 
negatively impact on the important brand of the USPS. That is 
why we must find ways to encourage first class mail and to 
continuously focus on improvements to handle parcels, 
magazines, catalogs, and the like. If any of these classes of 
service is eliminated or substantially reduced, the costs to 
cover the route carrier is simply spread across all other 
classes. That impacts negatively on those companies' business 
models.
    We have a chance right now, a real opportunity, to make the 
necessary changes to ensure that the USPS and the mailing 
industry as a whole remain healthy and viable. Frankly, several 
more years of business as usual could bring us to a point of 
real disrepair. This could be a crisis meeting rather than a 
planning meeting. Let's not allow that to happen. Let's work 
together. We are all committed on this side to get meaningful 
reform and get it now.
    I thank you very much, Mr. Chairman.
    [The prepared statement of Mr. William Davis follows:]

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    Mr. McHugh. I thank the gentleman. As his testimony 
underscored his commitment to this, we again express our 
appreciation for his commitment and leadership.
    Last on this panel, as we say, and it is certainly true, 
not least, Mr. Nigel Morris, who is co-founder and vice 
chairman of Capital One, one of the true financial powerhouses 
of this Nation and the planet. We welcome you here, sir, today 
and we look forward to your comments.
    Mr. Morris. Good afternoon everybody, and thank you very 
much Chairman McHugh and members of the Special Panel on Postal 
Reform and Oversight for giving me the chance to be able to 
share some of my thoughts here with you today. This is actually 
the first time that I have had the opportunity to speak at such 
a forum. Should there be any questions of me later, I hope you 
will be awfully gentle on me for being such a political 
neophyte.
    I am here actually representing Capital One, a company that 
I co-founded and am vice-chairman of, but also the Financial 
Service Roundtable, a group comprised of the hundred largest 
financial service companies, including but not limited to 
Citigroup, JPM-Chase, Bank of America, and also the National 
Postal Policy Council, a mailing association representing many 
of the largest mailers and the users of first class mail from a 
variety of industries including telco, utilities, and other 
financial service companies.
    Capital One is actually a leading provider of diversified 
financial service products. You may know us from our ``What's 
in your wallet?'' campaign. Of course, with vikings and 
visigoths and yetis and mermaids we are on the TV a lot, but 
also aside from being the fourth or fifth credit card company 
in the world, with a vibrant business here in the United States 
as well as in my home country of England we are also involved 
in auto loans, installment loans, and mortgages and are 
building out our portfolio at a rapid rate. We have 17,000 
people, 47 million customers, and that gives us a relationship 
with one in four or one in five American households. We have 
revenues of $10 billion and growing. Six years ago, we had only 
10 million customers. We now have nearly 50 million customers. 
We acquired every single one of those customers, almost every 
single one of them, through the mail. So we have to be very 
indebted to the Postal Service for allowing us not only to talk 
to those customers basically every month but also for the 
ability to build a tremendous franchise and now one of the 
largest credit card issuers in the world. We owe a great deal 
to the Postal Service for enabling us to do that.
    Today, we are the largest first class mailer in the United 
States and have been for the last 2 years. So the USPS clearly 
is a vital, incredibly powerful part of our business model, 
without which I think we would be in very deep trouble. It is 
in the light of that that I have the opportunity to talk to you 
today, because I think we today face some really grave threats 
to the USPS's business model. The USPS's success is critical to 
our success in being able to deliver product and to be able to 
service our large and burgeoning and increasingly demanding 
customer base.
    It has been 34 years by my count since we last had 
significant postal reform. Thirty-five years ago we did not 
have any cell phones. Thirty-five years ago the Internet was a 
twinkle in some techie's eyes. The world has changed 
immeasurably in that period. Today, the USPS has to deal with a 
torrent of technological change. Thanks to those changes, 
consumers can talk to each other, businesses can talk to their 
consumers in very different ways. The post office clearly has 
an opportunity to do a better job of keeping pace with those 
technological changes.
    Left unaddressed, the Postal Service's financial 
instability will ultimately lead to a vicious downward cycle. 
The cycle goes like this. Higher postal rates drive away 
customers and revenue. Fewer customers means lower volume and 
lower revenue because people, if prices go up, people mail 
less. Lower mail volume will force the post office again to 
raise its rates. Lower volume and lower revenue will create 
pressure not to invest in people and technology. The end result 
is a perpetuation of the downward cycle where we are charging 
more and more to fewer and fewer. It is a death spiral, but I 
do not think it has to be that way.
    Clearly, mailers have other options. We can communicate 
with our customers via the Internet. We can do it on cell 
phones. But the mail is a critical part of many of our business 
models, and we very much want it to be and continue to be a 
vital part of that model. The effective mail system is just as 
important as a sound highway system. I think that is how we 
need to think about it.
    That is why I am here today. I do not think we can afford 
to wait on this. The opportunities the post office has are just 
tremendous, but it takes bold and it takes unprecedented steps. 
I do not think we are talking here about tinkering at the 
margin with a business model that needs some tweaking. I think 
we are talking about something much more audacious, much more 
fundamental, and in that, much more difficult. I believe the 
Postal Service has to tap into the talents of the people it 
has, develop them, and grow their skill base so they can face 
an increasingly complicated world. It needs to harness the 
technology it has and invest in more technology. It is not just 
technology for reducing costs though, that is an important part 
of it. It is technology in delivery. It is technology in 
service levels. It needs to make the cost structure more 
productive and more flexible so it can deal with changes in 
revenues. It needs to develop innovative, value-added products 
and services. The Postal Service has some very unique assets. 
It has the monopoly on the last mile delivery. It has a 
tremendous brand. Those things can be levered, as well as many 
other things. Such innovations include the negotiated service 
agreements, which really provide incentives for mailers such as 
Capital One to actually mail more. I think we are in the very 
beginning of a major opportunity. The business basically has to 
become much more nimble, much more pragmatic, and be able to 
meet the changing demands of customers, particularly in a world 
where technology is moving at such a tremendous rate.
    We have had the challenge to work with the Postal Service 
in the development of one of those innovations. That innovation 
is the negotiated service agreement. Basically, the idea is 
that we as Capital One agree to receive undeliverable first 
class mail back to the company electronically rather than 
physically. It is much cheaper for the Postal Service, 
something like $40 million over the next 3 years, a significant 
savings. In addition to that, we receive volume discounts on 
first class mail. So if we mail more than we were going to 
mail, we basically at the margin get a lower price. That 
incentivizes us to mail more, which means that the post office 
is able to put more volume through its fixed-cost structure, 
which means it creates more sustainability in the business 
model.
    I think that is a wonderful story, and I am hats off to the 
people at the Postal Service and at Capital One who worked 
tirelessly to put this together. The challenge is that we filed 
for that more than 18 months ago. It took nearly 2 years to 
negotiate that deal. As we are aware today, nobody else is 
waiting in the wings to put together any such kind of NSA. I do 
not think that is anybody's fault. I think it is the fact that 
it is very difficult to do. It is a very onerous process, but 
the opportunity is clearly there for the Postal Service to 
incent companies to reduce their costs and in doing so put 
something else on the table for the company, and I think there 
is a real opportunity to build it.
    NSAs and arrangements like NSAs help everybody. They help 
the Postal Service by creating an increase in revenue stream. 
They help the companies of America and they help the U.S. 
taxpayer. They also help the customers and the people out there 
who receive the mail every day. Mr. Chairman and members of the 
committee, I strongly feel that implementing reforms like the 
NSAs and other things are really critical to the future. I also 
think it is worthwhile and important to recognize that 
reforming the post office is not an overnight project. We are 
not talking here about clicking our fingers and immediately 
moving to a different level of business capability.
    To achieve the kind of changes that we are talking about 
will require enormous patience from people on the dais. It will 
require a lot of investment and it will take a long time to do 
it. The Postal Service is very large, very complicated, and it 
requires an enormous amount of change. To do that, we need to 
align the staff and the investment dollars against specific 
goals, agree on those goals, set milestones, measure them, 
monitor them, report them, have a progress mechanism that makes 
sense, and establish clear accountabilities and transparencies.
    I believe that this all can be done. I believe it can be 
done because I have seen the changes in the Postal Service over 
the last couple of years. Many Americans should take 
encouragement from the outstanding successes and the solid 
efforts that have been made in the last few years by Jack 
Potter, his management team, and the 800,000 dedicated postal 
workers out there. It lowered costs by $1.1 billion last year, 
achieved 4 consecutive years of positive productivity gains, 
implemented a new pay-for-performance system for supervisors, 
postmasters, managers, and executives. These are big changes, 
but it is a drop in the ocean. In light of these 
accomplishments, we believe that the reforms that I have 
outlined today are not only realistic and achievable but also 
possible and incredibly exciting.
    Finally, I would like to put my word in here on the CSRS 
and urge speedy action to eliminate the escrow provision of the 
Postal Civil Service Retirement System Funding Reform Act. I 
urge you to remove the escrow created by legislation, which 
will allow the Postal Service to put these assets to better use 
and prevent a larger rate hike for all users in 2006. I urge 
you to transfer the cost of the military-related CSRS benefits 
from the Postal Service to the Department of the Treasury, as 
recommended by the Presidential Commission on Postal Reform. 
These steps will allow the USPS to have the financial breathing 
room to tackle some of the reforms and some of the actions that 
I have highlighted.
    So in conclusion, Mr. Chairman and members of the special 
panel, thank you very much for listening to me, and thanks for 
the opportunity to be able to speak.
    [The prepared statement of Mr. Morris follows:]

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    Mr. McHugh. I thank the gentleman for being here, and thank 
him for his enlightening testimony, at a truly historic moment, 
congressionally speaking: your first appearance, as you noted, 
representing a company of very significant fiscal impact in 
both the Nation and the world. I guess you could describe it as 
a ``What's in your wallet?'' company meeting a ``What's in your 
wallet?'' Congress. [Laughter.]
    So if I could ask one question of each of the panelists. If 
you could list one or two, three at the outside, ``must-haves'' 
in terms of any piece of reform legislation, what one or two 
would you pick?
    Mr. Smith.
    Mr. Smith. I think, Mr. Chairman, the one thing that is 
important to get the legislation through and solve a lot of 
people's fears about this is to have an appropriate firewall or 
appropriate control mechanism on the competitive product so the 
funds generated by the monopoly portion of the business don't 
go in and distort a competitive market. I think the reason that 
people are so concerned about that is what has gone on in 
Europe. As I am sure you know, or most of the committee knows, 
the British, the French, the Germans, and the Dutch all made 
the decision that they were going to permit their postal 
monopolies to take the funds from the mailers and the customers 
of that postal monopoly and to diversify into competitive 
markets.
    If you look at it from a purely return on investment 
standpoint, it is absolutely crazy. There is no rationale for 
it at all. You have taken 20 percent margin monopoly business 
cash-flows that really belong to those mailers or to the 
taxpayers of those countries and allowed managements to 
diversify sometimes in businesses that have a 1-percent margin 
that then has to compete against private industries on an 
unfavorable, unfair basis. So I think that is a key element of 
this and it is essential to have an appropriate mechanism if 
you are going to get the support necessary to pass the bill.
    Mr. McHugh. Thank you, sir.
    Ms. Moore.
    Ms. Moore. We would like to see the escrow provision 
released and CSRS addressed. I think the only thing in the 
Presidential Commission which was just excellent was that we 
would like the idea of a CPI cap passed by Congress, rather 
than left up to a regulatory board. Then finally, we really do 
need service standards so that we have timely news magazines. 
We have to ensure that what we pay for really meets minimum 
service standards for all classes of mail.
    Mr. McHugh. Thank you very much.
    Mr. Critelli.
    Mr. Critelli. I am going to mention two things. One is on 
the broad theme of growing the mail, I think there needs to be 
a commitment to growing the mail and I believe pricing 
flexibility to enable the Postal Service and the industry to 
grow and mailers to grow is very important. I also think that, 
consistent with the notion of partnerships, there really needs 
to be encouragement of more work with the private sector to 
produce the lowest-cost product at the best quality standards.
    Mr. McHugh. Thank you, sir.
    Mr. Davis.
    Mr. William Davis. Yes, I will start off by echoing what 
you just heard. Smart partnerships in work-sharing areas are 
critical and they offer tremendous potential that is yet 
unrealized.
    Second, I believe that a comment I made earlier about 
optimizing the network on an ongoing basis. We have too many 
places in the wrong place. We need some places in other places. 
We have to get at that and provide the right kind of service, 
the kind of service that Ann and her counterparts demand, by 
optimizing our network.
    Finally, no business can be sustainable without growth.
    Mr. McHugh. Thank you, sir.
    Mr. Morris.
    Mr. Morris. Chairman McHugh, I think the post office is 
under siege today, and I think the forces that are upon it are 
likely to worsen than get more benign. As a result of that, I 
fear that any kind of one-off or piecemeal activity will not 
lead to the kind of long-term sustainable outcome we need. So I 
say to you that I think the Postal Service needs to become a 
business, and much more businesslike, in that it needs to have 
pricing flexibility and it needs to be able to build volume, 
and not just volume that is in the traditional first class 
area. It needs to focus in a mammoth way on quality and service 
delivery. It needs to build a capability around innovative and 
new products to different segments. That is a key part of 
building volume. It needs to focus on productivity, best 
practices, and looking to variablize its fixed cost structure. 
And last, it can only do that if it invests in people and 
technology.
    To me, the one thing that hits me like a hammer is the need 
to run the Postal Service like a business. I will add, at the 
end, I think that really focusing on the CSRS is necessary to 
provide the breathing room to enable this to occur.
    Mr. McHugh. Thank you, sir. Thank you all.
    Mr. Davis.
    Mr. Davis of Illinois. Thank you very much, Mr. Chairman. I 
certainly appreciate the testimony from each of you.
    I notice that the President's Commission recommended that 
the Postal Service should meet the highest standards of 
corporate leadership, including a strong board of directors 
guided by the best business practices. We have talked about 
that a bit in terms of how do we move the Postal Service toward 
becoming, as some have described, a business. What are those 
best business practices that they may be talking about? Could 
we just each comment on that?
    Mr. Smith. Well, I think it starts with the corporate 
governance structure as you just mentioned, how the board is 
going to be appointed and what the criteria are for their 
selection. But I think equally important is to give the Postal 
Service management the potential to run their operations like 
we all run our operations. You have to have incentives for 
managers or rank and file employees, for that matter, to 
produce certain results against business objectives, to improve 
productivity, and to develop new products and services.
    I think the Postal Service management has to be given the 
flexibility to configure their network to meet the demands of 
the marketplace, rather than to meet some arbitrary criteria 
that is not market-driven. All of the things that have been 
mentioned here about partnerships and incentives and so forth 
to be more innovative have to be inherent in the delegated 
authorities to the management of the Postal Service.
    I think it is just those two things, and then of course you 
have the third, an unusual aspect, which is the mandated 
universal service from Congress, with the regulator having the 
power to set those rates or whatever the case may be. I think 
it is just that simple and that straightforward. I do not think 
that it is impossible to do that at all.
    Mr. Critelli. If I may comment, financial transparency is 
one of the key governance practices that the Postal Service, 
like all other organizations, needs to follow. I would just 
mention a couple of items. One, I referred to mail with 
intelligence or intelligent mail. One of the advantages of the 
work that has been done by the Mailing Industry Task Force, and 
this particular work has been chaired by Charlie Bravo of the 
Postal Service, is to get better visibility and auditability of 
day-to-day postal operations, first to track the mail and track 
activities so we can get better costing.
    Second, and I think CSRS legislation can go to help correct 
this, what is the real cost of running the postal business? It 
is very difficult to do that when you have costs imposed from 
outside the Postal Service that really do not relate to the 
real day-to-day cost of operating the business. So I think 
financial transparency is a theme that would be consistent with 
good governance today.
    Mr. Davis of Illinois. I think the penultimate answer could 
be a broader board of directors, make it more difficult or 
hamper best practices, meaning that the broader group of 
directors are us, the Congress and the general public in a real 
sense.
    Mr. William Davis. I would comment on that. Realistically, 
the answer is yes. I know who my boss is and it is 10 other 
directors and they are all independent outside directors. I 
think the thing that makes it work for us is that it is a very 
diversified group of people. I mean diversified by experience, 
the things they bring to the table that enhance my performance 
and capabilities. I do not see that in the postal process to 
the same degree. It is not as intimate in the postal process 
because of the scale and scope that you are describing. So I 
would say that is a problem. But I do believe that if you did 
increase the actual financial transparency, if we could look at 
a document every quarter for the Postal Service like we do for 
all of our companies, it would allow that board to be much more 
crisp in their dealings with management because they would be 
measured as a board on the performance of that company and the 
plans of that company, just like ours are.
    Mr. Davis of Virginia. Thank you very much.
    Mr. McHugh. I thank the gentleman.
    The gentlelady from Michigan?
    Ms. Miller. Thank you, Mr. Chairman.
    I think this question is to Mr. Critelli from Pitney Bowes. 
My family was in the marina business and I remember 35 years 
ago when we got our first Pitney Bowes meter and I just thought 
that was the coolest thing ever. That was my job to go down to 
the post office once a week and get that meter filled up and 
give the postmaster a check and you get your little red ink and 
fill all that up. Now it seems so unbelievably antiquated, but 
it was great at the time. You talk about 35 years and what has 
changed. Could you expand a little bit on what kind of 
technology is happening in your industry and how it is 
positively impacting? It has the potential to positively impact 
the postal services. You have talked about intelligent mail. 
Who has to do what to make I-mail a reality?
    Mr. Critelli. OK, first of all, I think the best benefit 
that we have provided in the last 25 years, and we really 
started in 1979 when we launched postage-by-phone, was making 
postal services and postage purchases available 24/7. We talk a 
lot about retail access, but supplementing what needs to be 
done at a post office, which is something like mailing of 
packages, with giving the people the ability, both businesses 
and small home offices and consumers, access to postal services 
24/7 is a major benefit. Today, that is available.
    Second, in conjunction with this whole move toward tracking 
and tracing of mail, being able to put variable data on every 
piece of mail. The example I always use is the business that 
today can track mail and know whether customers have paid their 
bills or whether a marketing piece has hit, so that they can 
coordinate other parts of a campaign. All of that is possible 
today.
    The Postal Service has invested heavily in,under the great 
work of Postmaster General Potter and his engineering and 
technology team, cameras that capture data and integrated data 
servers. They have done a great job in presenting that data 
through the ``Confirm'' product to the mailing public so that 
people can actually track their mail pretty closely from origin 
to destination. That gives it a high degree of value. It is 
something that Fred Smith did years and years before the Postal 
Service and he really showed the way in the package delivery 
industry. Now it is possible to do that in the letter mail 
arena.
    As I said, in the fight against terror, being able to 
narrow the scope of the mail where we have to do the more 
sophisticated security screening would be of great help to the 
Postal Service and the public. All of us, even in the midst of 
the anthrax crisis, in the industry were doing surveys and they 
showed that people trusted the mail that they got from an 
American Express or from another known mailer. They had 
difficulty trusting mail where they either did not recognize 
the return address or where there was no return address. 
Putting marks on mail helped narrow the scope of that anonymous 
mail and makes it easier to provide mail security.
    I could go on a lot longer, but I will just focus on those 
three benefits.
    Ms. Miller. Thank you. One more question to you as well, 
sir. You mentioned dynamic pricing.
    Mr. Critelli. Yes.
    Ms. Miller. And having the flexibility given to the Postal 
Service to be able to change pricing at a very quick rate, I 
suppose. Many of you have testified about how important it is 
as you are doing your business modeling to have a cap, to have 
predictability. I am just trying to understand what you are 
saying. If we were to give the Postal Service the ability to 
change prices very quickly, wouldn't that negatively impact the 
private sector's ability to do their modeling?
    Mr. Critelli. I think the private sector was talking about 
price increases. I think if you went to private sector 
companies and said, ``If you can get the mail in in August when 
it is a little lighter volume, we will reduce your rates,'' I 
think that would be very favorably received.
    I would say this would be equally true of consumers, as 
well as businesses. I know the greeting card industry has 
talked about a different rate for getting the greeting cards in 
before mid-December. So the idea of giving the Postal Service 
seasonality, as I said, there is a lot of creativity in these 
other industries. The phone companies have adopted these 
weekend pricing plans and hotels have off-peak pricing. Why 
shouldn't the Postal Service have the same ability to do 
promotional pricing to increase the volume of mail and increase 
the number of jobs in the Postal Service and in the industry.
    Ms. Miller. Thank you. Just one final question. Mr. Davis 
spoke about some of the worksharing agreements and you gave us 
a specific example of an agreement that you have. It took you 
18 months, I think you said, to get a 3-year pilot program. 
Could you tell us, perhaps give us some specifics on why it was 
so hard for you to do so, and specifically what we need to 
perhaps include in a piece of legislation to allow flexibility 
for the Postal Service to not let that happen?
    Mr. William Davis. Thank you for that question. In fact, in 
order for us to do this, we had to go through a tremendous 
amount of documentation to demonstrate the expected benefits 
and costs and impact across a whole cycle of factors. It had to 
then be reviewed extensively by the Board of Governors and Rate 
Commission and so on and so forth. It is ironic because the net 
result of this, the Postal Service hates sacked mail. They love 
it if you can bulk stack it and have it bar-coded so that they 
can easily handle it when it comes into a bulk mailing center. 
What this does is take a bunch of magazines that are now 
packaged individually because they are individual titles, into 
sacks based upon final zip code sorting. It allows us to take 
an inter-mix, different titles of magazines, which of course is 
to the benefit of the mailer if they get a discount for this, 
on a skid, all bulk mail for certain delivery locations, take 
it right to the bulk mail center, and let them just move it 
right off-line into wherever they want. What has happened so 
far, we have been at this for now about 6 months, we are 
reducing the number of mail sacks by over 90 percent, over 90 
percent in the test, and it is just a test. I cannot tell you 
the immense amount of money that we will save.
    The other thing we are doing, if you want to talk about 
helping the economy, is the small magazine companies now get to 
look like Time Inc. We can consolidate the mailings from 10 or 
12 small regional publishers, mail them bulk collectively 
together where they go to the same address, and they can get 
the same treatment, handling and benefit in the postal system, 
and therefore cost production, as a large mailer.
    It is very frustrating that it is so hard to make something 
happen that makes so much sense throughout the system.
    Ms. Miller. Thank you very much. We will certainly take 
that into consideration as we do our legislation. Thank you.
    Mr. McHugh. I thank the gentlelady.
    Mrs. Maloney.
    Mrs. Maloney. Thank you very much. We certainly appreciate 
all of your testimony. All of you testified in support of 
postal reform. What would happen to your business if you did 
not get it, say, in the next year? What would be the impact on 
your business, if any?
    Mr. William Davis. I would say that for our customers who 
are large and small catalogers, large and small business 
mailers like Capital One, and large and small magazine 
companies, it would be another significant rate increase and it 
would substantially decrease their efforts to use the U.S. mail 
as part of their business model, and that is a fact.
    I have been in this printing industry for 7 years. I have 
watched the mix between our customers' costs, we break it down, 
the paper costs, the printing and buying costs, and the mailing 
costs. It used to be a third, a third, a third. Right now, just 
in 7 years, I have watched it go to 50 percent postage and 50 
percent print, paper and bind. So instead of 33 percent it is 
now 50 percent for postage. That is because in this tough 
economy and with all the improvements we have been forced to 
make in the paper industry and in the printing industry to meet 
their needs, we have reduced our prices while the Postal 
Service has had, I guess in that period of time, four 
increases.
    Mrs. Maloney. Since you mentioned Mr. Nigel Morris' 
business and Ms. Ann Moore's business, would you like to 
comment for yourselves?
    Mr. Morris. I would be really happy to. Thanks very much.
    We are in the business of measuring the cost to acquire a 
new customer. That is where the bulk of our first class mailing 
is deployed. In the event the prices go up, a calculus of a 
Capital One or any other major credit card issuer or mailer 
will say, ``Now, is this a piece of mail that we still need to 
spend money on?'' And if we do still need to go after the same 
customer, is this the best way to go after that customer?
    It is very clear that you can book credit card customers 
through three principal channels: over the mail, we talked 
about that; the Internet, e-mail; and via the telephone. We 
have seen the cost of telephone booking fall significantly as 
the cost of telephone time has fallen dramatically over the 
last few years. The cost of an e-mail, depending on how you 
measure it, is awfully close to nothing. An increase in the 
cost of sending out a piece of mail, no matter how well-
targeted, if that goes up, the calculus would be to say, ``Now, 
we need to shift some of our business away from mail volume.''
    I think this is really an important thing to consider as we 
wrestle with how quickly to try to tackle these reforms. 
Businesses are in the business to make profit. Their 
shareholders demand that of them. We are in the business of 
booking customers for the lowest possible price. If the price 
of one channel goes up, we will deploy more volume to other 
channels. That will mean that a price increase will in the end 
mean less volume. I think the impacts of that type of 
decisioning on the system that we have articulated is pretty 
catastrophic.
    Ms. Moore. It is similar.
    Mrs. Maloney. I am also concerned about the number of 
magazines that folded in the district that I represent. What 
were the dynamics involved with the decisions for some that had 
been around for 75 years or more?
    Ms. Moore. When postage costs rise, it is our single 
largest expense item and we run around and examine every aspect 
of what else we can trim. A magazine can only shrink so small. 
You have probably seen most of your national magazines go down 
in size. We have a lot of thanks to give to the paper industry 
because they have done a marvelous job of developing 
lightweight papers to take the weight of magazines down until 
paper is almost transparent. We have cut back on direct mail, 
which reduces the mail volume. We encourage subscribers to pay 
by credit card so we do not have to bill you ever again and 
send out a first class bill. And then when all else fails, we 
raise our prices and disappoint most of our readers.
    In regard to the number of magazines folding, the economics 
of the magazine business has been just tough. In a soft economy 
when your advertising revenue stream is soft, these three price 
increases over 18 months really broke the back of some of the 
great brands in publishing. It prevents me from really giving a 
green light to a few new exciting ideas because of the 
uncertainty of what it costs to launch a new product and create 
new jobs.
    Mrs. Maloney. Would you like to comment, Mr. Critelli? What 
does your company do in response to the increasing prices of 
postage?
    Mr. Critelli. It hits us in a lot of different ways. We are 
probably less affected immediately than some of the other CEOs 
who are here affected. One of our growth areas has been the 
small business mailer. We have added 350,000 small businesses 
to our customer base in the last few years. We are up to 
825,000. Our main pitch to these businesses is using the mail 
to grow their business and using our technology to help do 
that. When they are moving away from mail because mail prices 
have gone up at a double-digit rate, it hurts our ability to 
get that small business customer, and that is one of the most 
profitable parts of our business. It accounts today for about 
16 percent of our total profit, our small business U.S. 
customer base. So that is an area that I think would be hit. 
Our enterprise customers shut down mail rooms. They shut down 
print centers. We lose employees and we lose revenues. Over the 
last few years, we have seen that hit harder, since 
particularly with the two big postal rate increases we were hit 
very hard in our management services billings. That is just 
beginning to come back now.
    Mrs. Maloney. You all mentioned that if they had an outside 
governing board that would give them ideas and work with them. 
I am sure they would be open to having ideas, but how would you 
make that happen? All of you would be great on it, but you 
probably do not have time to do it. So you are recommending 
something that is very hard to implement, really.
    Mr. William Davis. I am not sure that is fair to say. I 
suspect that many of us, if not all of us, including on the 
next panel, already do serve on at least one other public 
company board and that is exactly the role we play on those. So 
I am not sure that it would be any more difficult to get 
qualified people with various executive experiences and 
marketing and operating experiences to serve on a properly 
structured board for the U.S. Postal Service than I have 
getting a new director for R.R. Donnelley.
    Mrs. Maloney. Would you be willing to serve on a properly 
constructed advisory board for the Postal Service?
    Mr. William Davis. The answer is that I probably would. 
Yes, yes, properly constructed, yes.
    Mrs. Maloney. Would you, Mr. Morris? You created a business 
that is growing. The Postal Service could use some of your 
ideas.
    Mr. Morris. I would be more than happy to participate in 
any way I could add value.
    I think there are two issues going on here. One is an issue 
of governance and what is the best way of dealing with that. I 
think that is a lot about what you have heard about 
transparency, about accountability, and about hiring and firing 
capability from an independent, involved board. I think those 
are some of the characteristics that I have seen to be really 
effective in governance. The issue of ideas and innovation I 
think is extremely interesting as well.
    Mrs. Maloney. And technology, as you all emphasized.
    Mr. Morris. Yes. I think that you have within the Postal 
Service a huge asset, a reservoir of ideas, some of which are 
coming to the surface; some of which are not. I think there is 
a real investment that is necessary in people and training and 
people development around the skills that are necessary to 
compete. But I think there is no shortage of people in 
industry, and we are all here today because we care very much 
about the success of the Postal Service. There is no shortage 
of people who are willing to support ideas and support the 
Postal Service in getting to where it needs to get because we 
participate in that success. I am not going to speak for the 
other members of the panel here, but I for one would be more 
than happy to participate in any way where I could add any 
value.
    Mrs. Maloney. Thank you. My time has expired. Thank you.
    Mr. McHugh. You are welcome.
    Mrs. Blackburn.
    Mrs. Blackburn. Thank you, Mr. Chairman.
    I definitely want to say thank you to each of you for 
helping us as we look at the proper way to create a structure 
and environment in which the Postal Service can be viable and 
competitive and meet the needs that they are there for the 
public.
    Mr. Morris, one quick question for you, and then I have a 
couple of general questions that I would like for each of you 
to answer. Your negotiated service agreement, you mentioned the 
amount of time and energy that went into that. Last week when 
we had our hearing, we talked at length about the lack of an 
updated business model for the Postal Service, and the fact 
that this has gone 30 years without attention, which is a shock 
to many of us that have come from the private sector, and the 
opportunities that exist for the Postal Service that we would 
like to see them take advantage of in creating a more 
businesslike model for their operations.
    My question to you is, in establishing your NSA, did you 
reach out to the Postal Service and initiate the contact or did 
they come to you and suggest?
    Mr. Morris. I can't definitively answer that because I was 
not there during the early engagements. I can find that out and 
I would be more than glad to get back to you on that in 
writing.
    Mrs. Blackburn. I would love to know that.
    Mr. Morris. Let me say this, though, about the NSAs, if I 
can. To us, it is a resounding success and I think it is a win 
for the Postal Service and it is a win for Capital One. I think 
there were a lot of well-meaning people at the post office who 
burned a lot of midnight oil making this happen and we are very 
grateful to them for that. We were hoping that our NSA would 
lead to a clear signal for many other companies to engage and 
to be able to pull off similar arrangements, because I think 
there are palpable win-wins for everybody.
    Sadly, that has not happened. As I attempt to comment on 
that, I think one, a clear signal and unequivocal endorsement 
from Congress that says, ``Postal Service, we not only would 
like you to do this, we need you to do this,'' I think would be 
helpful within the ranks and apparatus of the Postal Service.
    Second, the post office I think needs to really work hard 
to streamline its processes to enable and to encourage these 
kinds of actions, and to be out there, as may be embedded in 
your question, to be actually out there marketing these kinds 
of arrangements, that say let's create win-wins, and I think 
that we heard that from other panelists. I think we are a long 
way from that, but I think it is entirely possible in this huge 
value that could be created if we were able to do that.
    Mrs. Blackburn. Thank you, sir.
    I would like to have an answer from each of you on this. 
Last week, we talked some about the Postal Service expending 
over 80 percent of its revenues on its labor costs, and looking 
at its labor costs, with the need to bring this down. I would 
like to hear from each of you just an estimate, a very quick 
estimate, of what your company spends on labor.
    Mr. Smith, we will begin with you.
    Mr. Smith. I believe that our labor costs as a percentage 
of the whole are a little less than half.
    Mrs. Blackburn. Thank you, sir.
    Ms. Moore.
    Ms. Moore. That is a hard question. I would guess it has to 
be more than 50 percent, but I would have to check and submit 
it on the record. Certainly we are a labor-intensive business 
like the post office, because I do not own any equipment. I 
print all my magazines on Mr. Davis' presses. So it is a lot of 
people. It has to be more than 50 percent, but I would have to 
check for you.
    Mrs. Blackburn. Thank you.
    Mr. Critelli.
    Mr. Critelli. We have two lines of business, product 
businesses where the number is relatively low, probably it is 
well below 50 percent; and our management services business 
where it is up in the 55 to 60 percent range. Company-wide, it 
is a little bit over 40 percent.
    Mrs. Blackburn. Thank you.
    Mr. Davis.
    Mr. William Davis. Again, we also have two businesses, but 
the main commercial printing business, it is about 30 percent; 
in our services business, like our graphics, arts, pre-media 
development businesses it is north of 50 percent. The total is 
in the 30's.
    Mr. Morris. Labor is a big component of Capital One's 
business, but I think the last time I looked at it, it is a 
little less than half of our entire cost structure.
    Mrs. Blackburn. OK. Thank you very much.
    May I ask one closing question?
    Mr. McHugh. You may.
    Mrs. Blackburn. Mr. Chairman, that is fine. I will submit 
it in writing.
    Mr. McHugh. I would only say to the gentlelady we have a 
couple more people and we do have another panel.
    Mrs. Blackburn. Yes.
    Mr. McHugh. If she could submit that in writing, that would 
be great. I thank her for her consideration.
    Mr. Schrock.
    Mr. Schrock. Thank you, Mr. Chairman.
    Thank you for being here today. I want to do a followup on 
something Mrs. Miller asked, and that is about the price 
stability. Virtually everyone is asking for price stability and 
pricing flexibility, but how do we give the post office more 
ability to change their rates, but give the customers the 
predictability they need? And can it be based pretty much on an 
inflation-based cap? Let me ask Ms. Moore and Mr. Morris.
    Ms. Moore. I absolutely believe it is possible. It sounds 
contradictory, but if you are working with a cap, you can work 
under that cap. What is interesting about pricing flexibility 
that they currently do not have is they do not have the ability 
to incent me to behave well. I should pay more if my direct 
mail piece cannot be sorted by a machine. I should be incented 
to do a lot of pre-palletization as we do at our printing 
press. Right now, for a variety of factors, it bothers me that 
I, even being the largest publisher, do not always prepare the 
mail in the most efficient way because the current pricing 
inflexibility does require me to put my magazines in very 
inefficient sacks. So that flexibility to incent my behavior 
will really drive costs out of the post office. He ought to be 
able to do that under some sort of CPI cap. Right now, if he 
wants to raise his prices, it takes, like everything, more than 
a year and that is too long for a business in this century to 
be strong. So it is very doable.
    Mr. Schrock. Mr. Morris.
    Mr. Morris. Could I start by saying that I think a 
methodology that says we are going to raise prices by inflation 
is very challengeable as a methodology, and one that in the 
business world we would never endorse. I think there is a need 
for the Postal Service to really understand its cost structure 
at a much more granular level, by product, on a fully allocated 
basis, understanding the difference between fixed and variable 
costs. I believe there has been a lot of progress made over the 
last couple or 3 years in that space, but I think there is a 
long way to go. Armed with that, you then can say, ``I 
understand what my costs are for this product and I can then 
look for this kind of margin on top of that product,'' and you 
can test to see if the market is willing to pay that price for 
that product. If the market is not willing to pay, it may be a 
business that you should not be in. If the market is willing to 
pay, then I think you have the chance of building something. 
Armed with that basic understanding of costs, you also have the 
ability to incentivize your partners, your customers, in ways 
to help you reduce that cost and have them have the opportunity 
to share in the collective bounty that comes from that. Without 
understanding rigorously your cost structure, you may be giving 
things away or you maybe not incentivizing enough. So that is I 
think a real core.
    I think second, there is a need to really embrace this 
notion of custom pricing around seasonality, as we heard a 
second ago, around promotions, and around the customer that you 
are dealing with. Are you dealing with somebody who is mailing 
a lot or a little? Are they mailing third class or first class? 
Have they been around for 10 years or 2 years? Can you return 
the mail by physical means or by electronic means? There are 
enormous amounts of flexibility that one needs to embrace 
there.
    Last, from a governance perspective, I think a 1-year 
turnaround or longer through quite a Byzantine process does not 
enable one to be able to do those things effectively. So I 
think there is a need to embrace some sort of managerially 
oriented pricing committee with clear boundaries as to what is 
allowable and what is not in the public policy interest, but 
giving flexibility at the line of scrimmage to be able to make 
those calls.
    Mr. Schrock. Mr. Critelli, how can the postal system most 
effectively partner with the private mailing companies to lower 
costs and improve efficiency?
    Mr. Critelli. I will comment on one piece of it, which is 
the partnership we have established with the industry to 
automate and pre-sort mail. Over half of the mail stream today, 
or pretty close to half, I do not have the exact data, is 
automated in some way. Activities, in addition to sorting, are 
done by that.
    As an example, we put the payment evidencing on the mail to 
save the Postal Service from doing that. We cleanse and correct 
addresses on the fly. We transport the mail so that it is 
downstream and it avoids steps in the postal process. But I 
think probably one of the bigger partners of the Postal Service 
would be in terms of a very effective partnership would be 
FedEx, so I would like to defer to Mr. Smith and have his 
comments on this issue as well.
    Mr. Schrock. Mr. Smith.
    Mr. Smith. It is really pretty simple about how you do 
these things in the broadest terms. That is, you simply need to 
take work out. Wherever that is possible, the management of the 
Postal Service ought to have the authority to quickly, 
decisively and cooperatively develop win-win pricing for their 
business partners, whether it is a customer or a supplier, 
which is what we are. I think if you follow that very simple 
formula, then there will be all sorts of creative things that 
the wonderful people in these organizations and the Postal 
Service, I mean, they have a very talented management team over 
there if they were given the flexibility to deal with these 
issues.
    Mr. Schrock. Yes, I agree. Just one final comment, we hear 
the term ``universal mail service, universal mail service.'' To 
me, ``universal'' means anything the traffic will bear, 
including the sale and mailing of used cars if they want to. 
Mr. Critelli, you came as close as I think it is, and you said 
in your summary here, the functions of the Postal Service are 
accepting, collecting, transporting, sorting, and delivering 
physical mail and packages, period, end of story. What do you 
think ``universal mail service'' is? Each of you?
    Mr. Smith. There is a long history on this, of course.
    Mr. Schrock. Give me the short answer, then. [Laughter.]
    Mr. Smith. I just wanted to preface that because you have 
to take the literally centuries-old concept of universal 
communications and the postal monopoly which is built around 
that, and separate that a bit from moving things. Now, that 
battleground as to what is a postal monopoly communication or a 
letter, and what is a thing the private sector can compete in 
has been the source of a lot of battlegrounds for a long time.
    Mr. Schrock. Right. It sure has.
    Mr. Smith. The practicality, though, has solved the issue. 
When you really look at what the Postal Service can do in its 
delivery system, and that is what dictates its capabilities, it 
really can handle things a couple of pounds or less. Now, if 
you want to stretch that to 4 pounds, 5 pounds, maybe, but 
beyond that they simply do not have the infrastructure to do 
it. In fact, when you get into vertical urban markets, they 
actually separate the smaller items and give those to the 
letter carriers, and have a separate delivery force for 
anything heavier.
    So the private sector is really predominant in above 2 and 
4 pounds, that general category, depending on whether it is 
urban or not, and below that is where the Postal Service has a 
tremendous density of deliveries, access to mail boxes and so 
forth. So whatever the universal service obligation, it really 
is down in that lighter weight area, publications, magazines, 
advertising, credit cards, things of that nature.
    Mr. Schrock. Right. Thanks.
    Ms. Moore. I thought that the Presidential Commission 
defined it well. What it means, the universal service 
obligation, what it means to me is very reliable, affordable 
delivery to every household of mail and small parcels and small 
objects. What I would really like to see is for the post office 
management to be relieved of the burden of trying to get into 
other businesses. They should stay very focused and do it very 
well.
    Mr. Schrock. Bingo. Yes.
    Mr. Critelli. I would agree with the last comment that Ann 
Moore made, which is the comment about focusing on the core 
business. What we have seen overseas are post offices getting 
into electronic mail, electronic bill presentments, certificate 
authority, and a lot of other businesses that they don't really 
have the core competencies to excel in, and they have stifled 
private sector and other innovation in those businesses in that 
process. Focusing on what they do best and giving them the 
freedom in the area of the monopoly to experiment for public 
benefit is what I believe this is all about, and growing mail 
as a vital communications medium.
    Mr. William Davis. I concur. I think by ``universal mail 
service,'' it means service to everybody on a periodic basis. 
Regarding what we deliver through the USPS, it is the stuff we 
do deliver today. I agree with Mr. Smith that parcels over 4 or 
5 pounds make no sense. As a matter of fact, let the record 
show, the USPS only delivers, this is I think 2-year old data, 
1\1/2\ year-old data, only delivers to the home 29 percent of 
the parcels that are delivered to the home, and in total only 
11 percent of the parcels. So there is plenty of competition 
out there because of their own limitations.
    Mr. Schrock. Thank you.
    Mr. Morris.
    Mr. Morris. I have nothing to add.
    Mr. Schrock. OK. Thank you all.
    Thank you, Mr. Chairman.
    Mr. McHugh. I thank the gentleman.
    We have one more questioner, a very distinguished member of 
both the full committee and the panel. I would remind the 
panel, you have a very important meeting that began 2 minutes 
ago. So with that, I would defer to the gentleman from 
Missouri.
    Mr. Clay. I thank you for yielding, Mr. Chairman, and I 
thank the panel for being here, sharing their time and their 
observations on this important subject.
    Let me start with Mr. Smith. I like to expedite things, so 
let's start with FedEx. The Postal Service is not a government 
entity, but it also is not a private entity. Instead, a number 
of special laws govern its operations, such as a statutorily 
mandated rate-setting process and a requirement that the Postal 
Service break even. What are some of the biggest handicaps the 
Postal Service faces that we need to change?
    Mr. Smith. I think you need to have the regulator dictate 
the universal service obligation that you decide is 
appropriate, and have then the Postal Service management 
delegated the flexibility to manage against that obligation in 
whatever way they see fit. And then in those sectors which are 
competitive, the regulator should simply ensure that there is 
no cross-subsidization and that there is a cap on the pricing 
in the competitive arena or an appropriate mechanism to see 
that funds do not flow from the monopoly business over to the 
competitive business. Those are the two essential features of 
whatever you do or ought to be in our opinion.
    Mr. Clay. One part of the business subsidizes the other 
one, is what you are saying.
    Mr. Smith. No, it should not be permitted to subsidize the 
other. That is the point. It gets back to this focus, because 
at the end of the day, there is no entity that can really 
provide universal service for these smaller items other than 
the Postal Service, at an affordable price.
    Mr. Clay. Thank you, Mr. Smith.
    Just out of curiosity, is there any truth to the folklore 
that you got the concept of FedEx by trying to overnight a term 
paper to a professor?
    Mr. Smith. I think where people talk about it, they laugh 
about the fact that I got a C grade on that paper, and since I 
have taken the oath here, I must inform you that was an 
extremely good grade for me, and I was very happy with it. 
[Laughter.]
    Mr. Clay. Thank you for that comment.
    Ms. Moore, you indicated that the current business model of 
the Postal Service is not sustainable. Would you explain your 
reasoning on that statement?
    Ms. Moore. That is just because the volume continues to 
plummet downward. I will admit that in the early 1990's, we 
could see this coming. We did, you know, form with several 
other companies an alternative to the post office. We tested 
alternate delivery with a company called Publishers Express, 
and we actually delivered magazines and catalogs, starting in 
the State of Georgia, to about 32 cities throughout the 
country. We proved to ourselves that you could run a business. 
We did actually break even in 1 month, I think, but we closed 
the business in 1996 because it was clear that the sustainable 
business was only to upscale zip codes in America, which 
happened to be where most magazines are delivered, and it did 
not seem good for the country that we, a big client, would 
leave and develop such an exclusive business. But I think that 
experiment in the early 1990's proved, at least in my mind, 
that this is very doable to stop this volume decline and these 
runaway costs, if we just practice good business.
    Mr. Clay. Thank you for that answer.
    Mr. Critelli, your statement indicated that the Postal 
Service mission needs clarification to be accomplished. Do you 
feel that there is ambiguity in the current mission statement?
    Mr. Critelli. Yes, I do, Congressman Clay. I think the 
Postal Service, especially if you go back into the 1990's, 
tested the limits of the mission statement by moving into 
several, what I think all of us would say, would be non-core 
businesses, and did not succeed at those businesses, but felt 
it had the freedom to do that, and did not have, I think, a 
clear direction that its mission is to make mail as affordable 
as possible.
    I would agree with Ms. Moore's comment. Again, I would 
reiterate her comment about focus. The Postal Service is the 
best at delivering magazines. If it came to the conclusion that 
it could promote more magazine publications by lowering its 
rates, as opposed to being locked into this death spiral that 
lower volumes mean higher rates, I think that would be for the 
public good. I think the Postal Service needs to get clarity 
that it is OK to do that. I don't think it believes today that 
it can do that. I think it is very locked into when its costs 
go up and its volumes go down, it has to do the counter-
intuitive thing, which is to raise prices to cover the costs, 
rather than figuring out how to grow the volumes to cover those 
costs.
    Mr. Clay. OK. Thank you for that answer.
    Mr. Davis, in your testimony you talk about the importance 
of service performance standards. One thing about the Postal 
Service that somebody said, it is a 200 year-old tradition. 
People look forward to receiving their mail on a daily basis. 
It is still a pretty good bargain at 37 cents for first class 
mail. Would you care to elaborate on the idea of what kind of 
performance standards?
    Mr. William Davis. My concept on performance standards in 
any business in any organization is that, frankly, if you 
cannot measure and do not measure something, you will not do 
what you should do. I believe that in anything that is 
important for the Postal Service, they ought to establish 
metrics and they ought to hold themselves accountable for it. 
That is one of the roles that my concept that the board would 
have.
    Mr. Clay. OK. Mr. Morris, please explain why the Postal 
Service should only be allowed to focus on its core competency, 
which is universal service. Shouldn't the Postal Service look 
for additional innovative revenue enhancement opportunities? 
Let me just hear your thoughts on that, please.
    Mr. Morris. Thank you, Congressman Clay.
    I do believe that there is a significant opportunity for 
the Postal Service to be much more innovative and ingenious in 
terms of its business model. I do, however, on the other hand 
believe that there is a need for disciplined focus around where 
there is a core competitive advantage, using business-speak. I 
think it is perfectly reasonable to recognize that you are good 
at some things and you are not good at others. In recognizing 
that you are not good at some things, you are willing therefore 
to be able to form partnerships with others who can do that 
better than you and you manage those vendor relationships. 
Everybody on this panel is doing that, and I think the Postal 
Service could look at that, too.
    In terms of exactly what businesses the Postal Service 
should be in and which ones they should not be in, I do not 
feel qualified to specifically articulate. I would say that the 
Postal Service does have some tremendous core assets. As you 
mentioned, it has the universality of delivery, it has the last 
mile, and it has an incredible brand. I think those are very 
valuable things to build around. It also has relationships with 
just about every corporation in America.
    So I think that there is an opportunity to take a step back 
in a disciplined innovation process to look at what things 
might be able to work and which ones might not, and be willing 
to experiment, rather than invest everything in big-bang ideas. 
I think there is a lot of learning and a lot of development 
here, and a long way to go.
    Mr. Clay. Thank you for your answer. I thank the entire 
panel for their answers.
    Thank you, Mr. Chairman.
    Mr. McHugh. I thank the gentleman.
    Lady and gentlemen, thank you so much for your patience 
over 2\1/2\ hours. As I said, I know you have another meeting 
to go to. I deeply appreciate your effort to be here and your 
contributions. We look forward to working with you. God bless 
you.
    While they are moving on, let's call the second panel.
    If I could call us back to order. It is my honor to 
introduce our second panel. Let me start by thanking them for 
their patience. I mentioned how the first panel devoted 2\1/2\ 
hours. The second panel has devoted 2\1/2\ hours and has not 
had the opportunity until now to appear and to testify. So 
thank you so much for that.
    As was the case in the first panel, we are very honored to 
have a very distinguished second panel. If I may introduce them 
as they are listed here: Mr. Lester Hess, chairman, Grand Lodge 
Advisory Committee, Benevolent and Protective Order of Elks, or 
as I know it, the Elks Club, thank you so much for being here; 
Hamilton Davison, who is chief executive officer of Paramount 
Cards, Inc.; Rebecca Jewett, president and chief executive 
officer, Norm Thompson Outfitters, Inc.; and Mr. Gary Mulloy, 
chairman and chief executive officer of ADVO. Our most 
heartfelt thanks and congratulations for your interest and for 
being here today.
    As I noted on the first panel, we do have your written 
statements, and without objection those will be entered into 
the record in their entirety. As we did request for the first 
panel, to the extent possible if you could summarize those 
comments so that we could get right to the dialog, it would be 
greatly appreciated.
    Welcome, and with that I would ask you to present your 
testimony in the order in which we introduced you.
    Mr. Hess.
    Mr. Hess. Thank you, Mr. Chairman.
    Mr. McHugh. You know what? I deeply apologize. It is 
absolutely nothing personal, but committee rules provide that 
we do have to swear you in. So if you will stand and swear with 
me.
    [Witnesses sworn.]
    Mr. McHugh. It has been a long day. I knew they would tell 
the truth anyway, but parliamentarians are sticklers. The 
record will show all four panelists responded to the 
affirmation in the positive. With that, again my apologies Mr. 
Hess, our attention is yours, sir.

   STATEMENTS OF LESTER HESS, CHAIRMAN, GRAND LODGE ADVISORY 
 COMMITTEE, BENEVOLENT AND PROTECTIVE ORDER OF ELKS; HAMILTON 
   DAVISON, CHIEF EXECUTIVE OFFICER, PARAMOUNT CARDS, INC.; 
  REBECCA JEWETT, PRESIDENT AND CHIEF EXECUTIVE OFFICER, NORM 
THOMPSON OUTFITTERS, INC.; AND GARY MULLOY, CHAIRMAN AND CHIEF 
                 EXECUTIVE OFFICER, ADVO, INC.

    Mr. Hess. Thank you, Mr. Chairman.
    I am chairman of the past national presidents of the Elks 
of America. The Elks are a nonprofit fraternal organization of 
slightly more than 1 million men and women. We service more 
than 2,200 communities located in every State across the 
Nation.
    For 136 years, the Elks have promoted charitable and 
patriotic programs in all the communities where we are located. 
As an example, volunteers from the Elks visit the patients in 
every one of this Nation's 163 Veterans' Administration medical 
centers every month throughout the year. They hand out phone 
cards. They do things like give canteen coupons away, personal 
hygiene items. They conduct parties, and from time to time they 
invite many of these hospitalized veterans to events such as 
Thanksgiving dinners at Elks facilities.
    Last year, a national survey showed that more than $200 
million were earmarked for Elks charities in terms of both cash 
and the value of service contributions. The Elks are only one 
of several hundred members of the Direct Marketing Association 
nonprofit federation. I wish to thank the committee for giving 
me the opportunity to speak on their behalf regarding our views 
of the future of the Postal Service in light of the President's 
recently announced principles.
    The nonprofit community is vital to the well-being of our 
Nation. Indeed, these nonprofit organizations are woven into 
the very fabric of American life. To a large extent, they 
depend upon the U.S. mail, particularly nonprofit standard and 
periodical mail, for their existence. The Elks recently used 
the U.S. mail to get donations from their members totaling more 
than $1 million for the World War II memorial that is going to 
be dedicated here in May.
    That is why we in the nonprofit world are vitally concerned 
with your efforts to shape postal reform. Since 1970, nonprofit 
mailers have seen an escalation in rates which at times has 
caused us to think about cutbacks in our charitable programs 
and our services. Since 1970, postal rates for nonprofits have 
increased more than 1,600 percent for periodicals. Commercial 
periodicals increased 558 percent during the same period.
    The cost for us to mail more than 1 million copies of the 
Elks Magazine each month has increased nearly three times the 
increase for commercial publishers. Although nonprofit postage 
is now fixed at a discount to the commercial rate, and we do 
not expect the gap to widen, we do recognize the need for 
postal reform that will allow for rate increases, but not a 
pure unlimited pass-through of costs to rate-payers. We simply 
seek a measure of stability for our rates. We would encourage 
you to establish some form of indexing so that, for example, a 
rate increase could not exceed the rate of inflation unless 
truly extraordinary circumstances existed. Otherwise, the 
nonprofits of this country are going to be impacted in their 
ability to continue doing their good deeds.
    There is the immediate crisis I want to briefly address, 
and that is the escrow fund issue. We agree that money could 
more properly be used for operational expense and to reduce 
debt. That translates into an increase in postal rates for us 
if the escrow is left in, that could be in the double-digits by 
2006. The Elks and other nonprofits simply cannot absorb 
double-digit increases without looking to cut some services. 
For the Elks alone, double-digit increases would cause us to 
reexamine a number of our charitable programs such as summer 
camps for children who are financially disadvantaged or have 
physical disabilities, to say nothing of the volunteer work 
that we do at the VA facilities.
    In addition to the need to revisit the escrow requirement 
in the 2003 law, we also agree that the military pension issue 
ought to be revisited. If this responsibility is transferred 
back to the taxpayers as it was before via the Department of 
the Treasury, the impact of postal rates on us is obviously 
going to be less severe.
    Finally, I want to stress that the Elks, as well as all of 
the others like us in the Direct Marketing Association 
Nonprofit Federation, will continue our good works in support 
of government, regardless of the direction of postal reform. If 
you call on us, we will be there. However, you can help us 
perpetuate our charitable work by adopting appropriate and fair 
postal reform.
    Thank you.
    [The prepared statement of Mr. Hess follows:]

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    Mr. McHugh. I thank the gentleman. I think it is worthy to 
note that you represent a broad spectrum of charitable 
organizations that do amazingly effective work, as he outlined 
with respect to his particular organization. The Elks are so 
very important, and rely upon the Postal Service for their very 
existence. So your testimony is particularly appreciated.
    Next, we are honored to have Mr. Hamilton Davison, who is 
chief executive officer of Paramount Cards, Inc. Mr. Davison, 
thank you so much for being here, and we look forward to your 
testimony, sir.
    Mr. Davison. Thank you, Mr. Chairman. Good afternoon, 
distinguished members. I appreciate the opportunity to present 
to you here today. My company is an industry leader in what we 
call value-oriented marketing. I believe value-oriented 
thinking needs to be imbued into the Postal Service and 
supported by this panel, as well as this Congress.
    Our postal system is in danger and needs a systematic 
overhaul. You have heard from many interested parties. Because 
over half of all cards purchased are mailed, my views represent 
both my company and my industry, but I also believe are 
reflective of the general wishes of the American public. 
Without uniform universal access to the mail at a price that 
people value, the postal system is at risk.
    For the most part, I agree with the Commission's 
recommendations and the President's five principles for reform. 
We can tweak elements, but the broad strokes are good. In my 
written testimony, you have some specific recommendations for a 
postal reform bill. Let me underscore two.
    First, a strong, effective regulatory mechanism is vital. 
So is a congressional mandate for both fairness and cost 
alignment. You heard that earlier. Protection for the captive 
postal customer or the average American was a cornerstone of 
the Presidential Commission. The approach taken in the most 
recent postal legislation by Representatives McHugh and Waxman 
certainly accomplishes this.
    Second, grant the Postal Service the authority to control 
its work force and facility costs just as companies do. This is 
a major concern for me on two levels. First, controlling cost 
is essential for long-term viability. Second, if the 
Commission's comprehensive cost control recommendations were 
enacted, I could accept a rate-setting process that lacks prior 
review, a position I would not have considered previously.
    The Commission also raised the issue of wage comparability, 
which in my judgment should be resolved. If we are serious 
about placing the Postal Service on a firm financial footing, 
this is a seminal question that must be answered before any 
work force changes are contemplated. This ties directly with 
the President's call for best practices, transparency and 
accountability.
    I respectfully suggest that the General Accounting Office 
promptly be assigned the task of reviewing postal and private 
sector pay and benefit levels. Periodical wage and benefit 
comparability reviews are consistent with all commercial 
enterprises with which I am acquainted. In my company, we 
conduct such a review every 2 years.
    Another industry best practice is benchmarking the ratio of 
supervisors to workers and a periodic restructuring and 
rationalization of management and staff levels. In my company, 
we work actively to reduce headcount per unit output. We do so, 
often without layoff or dislocation, to minimize personal 
disruption. With a high number of postal employees soon at 
retirement age, this is a great time for this type of work.
    Another aspect of the Commission's cost control 
recommendations include network optimization. I urge resisting 
provisions of law inhibiting the closing of post offices or 
processing facilities. In the retail trade, it is accepted 
practice to close and relocate a percentage of stores each year 
to mirror shifts in population, traffic or shopping patterns.
    Businesses also reassess their warehouse and distribution 
center placement, making changes when costs justify it. It is 
critical that postal management have the authority to 
continuously optimize facility utilization and its logistics 
network free from outside constraints, so that they can place 
postal services where Americans live, work and shop.
    Personal correspondence in the mail is what Americans value 
most and is among the most profitable. It forms the foundation 
of what Americans want from their postal service. It used to be 
common wisdom or commonly held at least that household postage 
was inelastic. Today, research has shown that the price of 
single-piece first class stamps does affect demand. If personal 
mail were to disappear, much of the utility of the postal 
system for business mailers would disappear with it. We must 
look beyond volume and recognize the interdependence between 
mail types. If Americans stop going to their post office, it 
will kill the system for everyone.
    My comments are not criticisms of current postal 
management; as a matter of fact, quite the contrary. They have 
been aggressively managing the business and taking strong 
action indicated by the decline in volume. I both appreciate 
this and support the moves that they have made. In my judgment, 
that must continue. But congressional reform will set the 
ground rules and the tone for future administrations. Without a 
mandate and the tools to drive increasing advances in its 
competitive position, the Postal Service will not enjoy the 
widespread use and brand equity that it has today.
    As our high-tech life accelerates, along with the 
uncertainties of security alerts, military action and the 
everyday stresses felt by families as they are stretching 
budgets and meeting obligations, the postal system is a comfort 
to Americans who consider it a birthright. Each year, over 240 
million Americans exchange greeting cards. This week, 1 billion 
Valentines will be sent. You can send a Valentine to all 
Americans through the passage of postal reform.
    Thank you, Mr. Chairman, for your time. I would be happy to 
answer any questions you have.
    [The prepared statement of Mr. Davison follows:]

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    Mr. McHugh. Thank you, Mr. Davison.
    Next, Ms. Rebecca Jewett, who is president and chief 
executive officer of Norm Thompson Outfitters, Inc., the great 
catalog company. We are thrilled that you are here today, 
ma'am.
    Ms. Jewett. Thank you very much. And thank you so much for 
inviting me to be here today.
    My name is Rebecca Jewett and as of 2 weeks ago I am 
honored to have a new role at Norm Thompson. I am now vice 
chairman of Norm Thompson Outfitters. Norm Thompson is a 
catalog company. It was formed 54 years ago in Portland, OR. We 
are a mid-tier catalog company, certainly nowhere near the size 
of our colleagues on the former panel. We employ 600 full-time 
and 2,000 seasonal employees. We sell merchandise to upscale 
customers throughout the United States.
    A week ago, I asked our accounting department to rank our 
vendors based on the amount of money we spend with them. You 
would be interested to know that our largest vendor is the 
USPS. In fact, we spend with the USPS four times the amount 
that we do with our No. 2 vendor. Postage represents 50 percent 
of our marketing costs. So needless to say, our employees 
depend on the USPS. I like to think as the USPS goes, so goes 
Norm Thompson.
    In addition, companies who depend on an affordable postal 
system employ, as we heard earlier, 9 million people, and 
contribute $900 billion to our economy. No business can survive 
on a 34 year-old business model. Certainly, the catalog 
business has changed significantly since I entered it in 1981. 
It is amazing that the USPS can still operate on its model from 
the 1970's. The USPS is a cornerstone of our democracy, because 
we must be able to communicate on a personal and business level 
with every citizen. That is one of the needs of a democracy.
    The USPS is also a major contributor to our economy and it 
is a creator of jobs. Now, we have the best democracy in the 
world and we have the largest economy. We deserve to have a 
world-class postal system to provide infrastructure to support 
democracy, the economy and job creation. I want to thank each 
of you for your work on this issue. It is important and 
foundational for all Americans. We support reform.
    Now I would like to discuss how postal rate increases 
affect my company. We need the USPS to have flexibility to set 
rates. I have run catalog companies since 1990. I can tell you 
how earth-shattering double-digit rate increases were to 
catalogers in the 1990's. In fact, we wondered if we would 
survive. We survived for four reasons. First, the printers 
innovated and removed significant costs from their structure 
and passed those savings on to us as customers. This helped 
mitigate postal rate increases. Second, the paper market 
softened and we found we could purchase paper for less. This 
also helped mitigate postal rate increases. We as mailers knew 
that we had to do business differently. So as a mailing 
community, we became much more sophisticated in how we deploy 
our marketing dollars. This also created cost efficiencies and 
helped mitigate the postal rate increases. Last, the USPS was 
able to contain costs and implement worksharing, which has 
stabilized rates in the early 2000's, and we thank them for 
that because it has been very helpful.
    The USPS has done a good job so far, but we need Congress 
to empower the USPS to build a new business model to provide a 
world-class infrastructure. As mailers, we need stability and 
predictability for postal rates and rate increases to be held 
at or below inflation.
    Let me tell you about the impact of increases above 
inflation, what impact they would have on our company, if there 
were an increase 10 points above the inflation rate, what we 
would do. The low-hanging fruit has already been taken. So we 
would have to cut circulation in ways that would be 
fundamentally detrimental to both the USPS and to Norm 
Thompson. What we would do is we would cut our prospecting 
circulation in the months between January and September. We 
would not cut circulation during the profitable holiday season, 
which is I believe the peak volume season for the USPS, and 
when they would actually probably prefer us to cut volume. We 
would be cutting volume in the low-volume months when the USPS 
has excess capacity. This would be very detrimental to the 
USPS.
    Cutting the circulation has a negative impact on my company 
also. We would have to cut labor to match the reduced demand, 
and who would we cut? Well, we would cut wonderful full-time 
associates who have health benefits. We would not be cutting 
our seasonal part-timers, who do not have health benefits. We 
would be cutting associates in our customer phone center in 
Oregon where there is 7 percent unemployment. It is one of the 
highest unemployment rates in the country. As a country, I 
would like to say we have lost a lot of telemarketing jobs to 
India in the past couple of years. Wouldn't it be an enormous 
disappointment if a postal rate increase contributed to the 
loss of jobs in this important sector? We would also have to 
cut full-time associates who are also covered by health 
benefits from our West Virginia distribution center. The State 
of West Virginia has done a magnificent job over the past 10 or 
15 years creating new jobs in that State. I would also like to 
say that as a country, we have lost many manufacturing and 
warehousing jobs to overseas production. Again, wouldn't it be 
an enormous disappointment if postage rate increases 
contributed to more job losses in this sector also?
    So how many jobs are we talking about? Well, in the greater 
scheme of things, after all, we are a relatively small company, 
not much, maybe 20 jobs. But it is significant to the person 
who is losing their job that they have lost it. But also I want 
you to consider that there are 2,000 catalog companies in this 
country, and 20 jobs across 2,000 catalog companies is a 
significant number of employees, about 40,000. With a 15 
percent increase, it would be another 50 percent, these 60,000 
jobs lost. This does not include the ripple effect on our 
vendors.
    So raising rates above inflation to solve the USPS 
financial problem does not work. We need Congress to empower 
the USPS to build a new business model so that it can provide 
world-class infrastructure to support our democracy, our 
economy and our jobs. So how will they do this? I leave 
answering this question to others and my written testimony on 
the how.
    I would like to speak just briefly about universal service. 
Norm Thompson needs universal service. It is what the USPS does 
best. That last mile is very critical to us. Universal service 
for all catalogers includes package delivery. We use USPS for a 
majority of our product delivery. But even fellow catalogers 
who use other package delivery companies know that USPS 
provides competition which holds down costs for all.
    So I want to thank you for your important work. You will 
have a major impact on preserving what is best about our 
democracy, our economy and our jobs. All of us from Norm 
Thompson want to thank you for the important work that you are 
doing.
    [The prepared statement of Ms. Jewett follows:]

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    Mr. McHugh. I thank you, Ms. Jewett.
    I apologize we have to run. We have two quick votes. Mr. 
Mulloy, it is like icing the field goal kicker, but we will 
give you a new chance. We will return as quickly as we can. 
Please stand in recess until we return.
    [Recess.]
    Mr. Schrock [assuming Chair]. I apologize for this 
seemingly disorganized day, but the fact is that is what it is. 
I was talking to one of my colleagues here on the way over, and 
I said, ``You know, if these guys did business like we do this, 
they would all have been bankrupt decades ago.'' So we need to 
use you as role models. Mr. Mulloy, you have the patience of 
Job and I really do appreciate that. We are glad you are here 
and we look forward to your testimony.
    Mr. Mulloy. Thank you.
    Mr. Schrock. Excuse me, before that. Ms. Jewett had to 
catch a plane, and so the panel will submit questions to her in 
writing, just so nobody will think we drove her off. Thank you.
    Mr. Mulloy. Thank you, Mr. Schrock. As you said, my name is 
Gary Mulloy and I am chairman and CEO of ADVO. ADVO is the 
largest in-home print advertising company in the United States. 
We touch 8 out of 10 American households weekly or monthly. I 
am pleased to be here on behalf of our 3,700 associates and all 
of the associates of the 20,000 clients large and small across 
America that rely upon us to deliver their advertising messages 
via, predominantly, the U.S. mail.
    I have submitted extensive written testimony. I am not 
going to belabor a lot of what is in those materials. I am 
going to focus on several issues today. However, as you have 
heard from most of the panelists, both on the first panel as 
well as this panel, I would echo that we believe that there is 
a tremendous amount of growth potential in the mail. The Postal 
Service, if properly focused, can in fact prosper and benefit 
from that growth.
    Unfortunately, for the last 15 years postal rates have been 
higher than I believe truly necessary to fund the operations of 
the Postal Service. The result has been that less than 
competitive pricing has led existing and potential customers 
elsewhere. It has also led to the creation of competitive 
alternatives, some of which have been created by people like 
ourselves who have been forced to look at private carrier 
delivery and other sources because of the fear of rising postal 
costs, which in some cases are twice that of running your own 
private carrier delivery system. In fact, we have personal 
experiences just like the one another panelist talked about, 
Ann Moore. We do run our own private carrier delivery service 
in several large markets, and the costs are substantially less.
    We believe that all in private industry would use the USPS 
more and both the Postal Service and industry would experience 
growth if prices and rates were established and maintained in a 
more market-oriented efficiently run system. Our current 
strategy for our own company calls for us to double our 
business over the next few years, but much of that growth will 
of necessity be outside of the postal system unless changes are 
made.
    The potential market is big enough to pay for universal 
service, and universal service is, we believe, 6 day-a-week 
delivery to every household in America. It is big enough to end 
discussion, we believe, about 5-day delivery and get the Postal 
Service thinking about the opportunities presented by 7-day 
mail delivery instead. It is even big enough to relieve 
pressure on some of the traditional features of the Postal 
Service that the American public has long enjoyed, such as post 
offices in the smallest communities in the country.
    To tap into this, though, we have to have competitive 
prices. We believe such an extended period of stability is not 
only desirable, but reasonable and achievable. Stable rates are 
not a pipe dream. Since 1971, the Postal Service has been 
required, as you know, to break even and to charge mailers its 
cost of operations. Contrary to popular perceptions, however, 
and to media misrepresentations, the U.S. Postal Service has 
not been chronically losing money or breaking even in its 
operations. In fact, since it was created, the Postal Service 
has generated an operating profit, and a handsome one.
    Since 1971, postal revenues have been billions of dollars 
more than the cost to fund operations of the U.S. Postal 
Service. Even if Congress were to force the Postal Service to 
book all 100 percent of its health care liability for retirees 
today, the Postal Service would still have generated billions 
more in excess revenue through rates charged mailers and 
consumers and the rates that are still in place today.
    This money has gone to the U.S. Federal Treasury. The USPS 
is not subsidized by the taxpayer. It has surprisingly been 
subsidizing the taxpayer. Last year, this committee took the 
first steps to correct the retirement overpayments made by the 
U.S. Postal Service to the U.S. Treasury. This was an important 
first step, but it is only a partial and temporary solution, 
and included some provisions that, as we have discussed earlier 
today, are not in the long-term best interests of the Postal 
Service, the consumer or the economy at large.
    Part of last year's fix required the Postal Service to pay 
military, Peace Corps and other government retiree benefits. 
This action transferred $28 billion in additional obligations 
to ratepayers. These costs are not rightly the responsibility 
of the Postal Service and its customers and consumers. Unlike 
other Federal agencies, the U.S. Postal Service does not 
receive Federal appropriations, but must charge for the 
services it provides. The cost of military service time for 
most Federal agencies is paid for by the general treasury, and 
thus taxpayers as a whole. Singling out postal ratepayers to 
cover this obligation that benefits all taxpayers is thus 
unfair.
    Customers are able to cover the costs of Postal Service 
operations through the rates they pay. However, adding 
additional expenses such as retirement benefits earned as a 
result of military service pushes postal rates up to 
uncompetitive levels. The President's Commission recommendation 
to undo last year's damage must be taken care of immediately, 
we think, by this body. All of the customers of the Postal 
Service, with the exception of nonprofit mailers, are also 
taxpayers and our taxes fund these and other programs. To be 
required to pay for them again through higher postage rates is 
a form of double taxation.
    Also, in implementing last year's fix to the CSRS 
overfunding, the OPM also quietly made a very large accounting 
change with regard to allocating the responsibility to pay for 
pensions earned as a result of work performed by postal 
employees prior to 1971. The 1970 Postal Reorganization Act 
made the Treasury responsible for employee benefits earned 
while working for the old Post Office Department, and it made 
the Postal Service responsible for benefits earned after it 
took over.
    For years, the benefit obligation for retirees with 
employment both before and after 1971 was allocated between the 
Postal Service and the Treasury, based on the number of years 
of service employed at each agency, allocating the same dollar 
amount to each year of employee service. Last year, when the 
factual actuarial error regarding CSRS funding was corrected, 
the Office of Personnel Management quietly switched to a new 
allocation method that effectively shifted a large portion of 
the pre-1971 obligation to the Postal Service to the detriment 
of the Postal Service and therefore its customers and the 
consumer.
    While there can be legitimate disagreement about the proper 
method for making judgments about allocation of benefit 
obligations, the factual actuarial error is not open to 
judgment or opinion. The allocation method used for 32 years 
was fair and was recently determined to be consistent with 
common practice by Hay Associates, an actuarial firm 
commissioned by the Postal Service. Changing it now shifts pre-
1971 Treasury obligations to the Postal Service and its 
ratepayers as a sort of penalty for finally correcting the 
factual actuarial errors that have been allowed to stand for 
years.
    The difference between the old allocation method, which had 
been in place for years, and the new method imposed by OPM, 
changes the Postal Service's balance sheet by tens of billions 
of dollars, far more than enough to fully fund both CSRS and 
retiree health benefit liabilities. This is an unfair burden 
that today's Postal Service and its consumers and customers 
should not have to bear. Additionally, the legislation passed 
last year required for 2006 and beyond that the Postal Service 
must resume making overpayments to the CSRS system in the form 
of escrow payments. As you have heard from other people today, 
we believe that this should be struck down. Because these funds 
are from Postal Service customers and consumers, they could be 
more properly used to be invested in better productivity and 
efficiencies within the Postal Service, and therefore those 
benefits would provide an overall stimulus for the U.S. 
economy.
    This committee can take steps toward righting these wrongs 
and put the Postal Service back on track to growth with better, 
expanding service. Congress can and should take strong action 
to clean up the misallocation of billions of dollars in paid-in 
retirement dollars by the USPS by first, returning the 
allocation methodology for retirement benefits earned by USPS 
workers before 1971 to the method utilized prior to last year 
and that method used by the vast majority of pension fund 
calculations, whether that be for private sector or public 
sector. The USPS has appealed to the Board of Actuaries as 
provided for in last year's legislation, but there is no need 
for Congress to await the result of that appeal to apply this 
commonsense solution and eliminate the effects of this 
arbitrary punitive action. Second transferring responsibility 
for military and other government service benefits back to the 
general treasury recognizes that the Postal Service is unlike 
other Federal agencies that receive Federal appropriations. 
Once relieved of both of these unfair burdens, the Postal 
Service will be able to fully fund its CSRS and its health 
benefits liability. Finally, the Congress should repeal the 
escrow provision of last year's law through at least 2008 and 
allow the true profitability of the operations of the Postal 
Service to be utilized to invest in productivity and efficiency 
improvements, and generate the economic stimulus of rate 
stability for this critical component of the U.S. economy.
    According to some of the most respected economists studying 
the industry, if all of these things were addressed in a 
comprehensive way at a single time, with the help of other 
meaningful reforms that this body can enact to control costs 
and grow the business of the Postal Service, that Service 
should be able to fund its retiree health care obligation in 
total, eliminate debt, and freeze rates for years beyond the 
requirement of the current law, at least through 2008 and 
probably beyond.
    With the retirement funding issues addressed, the 
principles for postal reform articulated by the administration 
will succeed. In particular, I would note the urgency of 
applying the principles of best practices and flexibility to 
the areas of pricing and costs. The Postal Service needs to be 
able to respond to its marketplace and, as the Presidential 
Commission recommends, be given greater ability to enter into 
contracts with its customers large and small. The Postal 
Service must also be given the tool to control costs and manage 
its resources.
    These steps will allow the Postal Service to build 
substantial volume that covers its costs and contributes 
properly to overhead at a time that the Service will be 
undergoing major systematic changes that you are championing. I 
would again call your attention to the written materials that I 
have submitted, which go into greater detail on these and other 
issues.
    The stakes for the American consumer, our economy and the 
business users of the U.S. Postal Service could not be higher. 
I think you have heard from every other member of both of these 
panels that in various industries and various constituencies, 
this is very important to us. The time is now, and we urge you 
to act expeditiously.
    Thank you very much.
    [The prepared statement of Mr. Mulloy follows:]

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    Mr. Schrock. Thank you, Mr. Mulloy. As I listened to you 
speak, I understand your arguments for pension reform and why 
you believe they have been overcharged. I also understand why 
an extended rate freeze would be good for mailers. How would 
all that be good for the Postal Service?
    Mr. Mulloy. I really believe that, as you have heard many 
people on the panel say, a normal amount of price increase is 
to be expected in relation to inflation is in fact the wrong 
way to approach a business. I think it is important that 
mailers and the consumer look at the mail channel as having 
pricing stability and in fact use price to encourage the kind 
of behaviors that are going to drive greater efficiencies and 
productivities to better prolong the life of the U.S. Postal 
Service. It is a vital part of the communications fabric of our 
country and the business fabric of our country. We think that 
prolonging that and extending the life of it and making it an 
even more vital part of our economy is critical.
    Mr. Schrock. Mr. Davison.
    Mr. Davison. Congressman, we heard from our customers loud 
and clear that they felt the price of our products were too 
high. We completely changed our strategy. We completely 
reinvented our supply chain and changed everything about our 
company, including launching a retail concept where we offer 
regularly half-price cards every day. We have been rewarded 
with increased volume, increased demand, increased consumer 
traffic. There is a factor of elasticity of demand in many 
things. I suspect strongly and have actually read some research 
that confirms that the amount of consumer mailing, at least, is 
strongly dependent on the price paid at certain times of the 
year, in particular holiday card times where there are multiple 
sending situations.
    So I think there is a case to be made in a variety of 
industries, certainly within a variety of mail segments, that 
getting some cost control and efficiency improvements will 
actually improve the amount of mailing. It does not have to be 
a zero-sum game. That does not mean that you pay people less. 
It just means that you improve the system to get more out of 
it.
    Mr. Schrock. Mr. Hess, do you have any comments on that?
    Mr. Hess. Only that I do not speak of course from a profit 
perspective, as everyone else here does. I am speaking for the 
nonprofits. But in terms of how it would help the Postal 
Service, we believe that some stability in the rate structure 
is going to keep the volume of mail from the nonprofits up 
higher than it ordinarily would if there is not stability in 
the rate structure.
    Mr. Schrock. Yes, I understand. There are some who believe 
that the U.S. Postal Service will soon be obsolete due to the 
high-tech types of things and little machines like this that 
all of us seem to carry. Why is there a place for mail in this 
economy? By asking that, I am not suggesting there is not. I 
believe there is, but I would like to get your spin on it.
    Mr. Hess. From the nonprofit perspective, we are unlike 
businesses in that so many of us do not have computer terminals 
like a business is often equipped to do. We have to rely on the 
U.S. mail and we do.
    Mr. Davison. When computers were invented, everybody said 
we were going to get rid of all sorts of paper in the office. I 
do not know about your office, but mine is still filled with 
lots of paper. When the video cassette came out, they said that 
movie theaters were going to go away. When e-mail came out, 
everybody said that people will stop sending greeting cards. 
None of those things have happened. There is a place for hard-
copy correspondence, and there is keepsake value of certain 
things that come through the mail. There is just intrinsic 
value that cannot be harnessed in other ways. So I do not see 
the mail system as obsolete. It may go through increases and 
decreases in volume and load, but I think through some of the 
ideas that you have heard expressed here and elsewhere, there 
is an opportunity to continue to stimulate that demand.
    Mr. Schrock. I agree. When I finally leave Congress some 
day, I want to come back and be the person that sells paper to 
this place. [Laughter.]
    I can make a fortune.
    Mr. Mulloy.
    Mr. Mulloy. I would add to that, and probably even 
emphasize it more, that if you look at what has happened to 
most of the computer-driven business models, they have greatly 
enhanced their utilization of the mail to converse with the 
customers that they tend to prospect through the computer. It 
is an irreplaceable communication device that is important to 
the fabric of our country and our economy. For us to underserve 
it and underutilize it in the future or today is a crime. I 
think what we are really arguing for, all of us here, is that 
there are growth opportunities in this channel. It is not an 
obsolete channel. It in fact is an incredibly positive 
communication device for our economy.
    Mr. Schrock. Yes, thank you.
    Mr. Davis.
    Mr. Davis of Illinois. Thank you very much. I thought for a 
moment there that you would come back as the Postmaster 
General. [Laughter.]
    Mr. Schrock. That wouldn't be all bad either.
    Mr. Davis of Illinois. Well, lots of work to do.
    Gentlemen, let me thank you so much for your patience and 
also for your testimony. During the last discussion, we heard a 
great deal about financial transparency. Do you think that 
perhaps an outside auditor or some other independent source 
should certify that the data we are getting from the Postal 
Service in terms of product costs, financial results and other 
data are complete and usable to make decisions and 
determinations about it?
    Mr. Mulloy. I guess I would say, sir, that I believe that 
the people of the Postal Service are a very high integrity, 
very highly intelligent group of people. I think they have the 
ability to fully assess and evaluate the data that exists about 
their business. I think what we would encourage you, and I 
think from the thrust of the two panels today you have heard us 
say that what we are really asking is that they be empowered to 
take the actions that such an analysis would in fact lead them 
to. That is the biggest single need. They have the access. They 
have the ability, and we all I think are very complimentary of 
the people of the Postal Service in terms of their capabilities 
in that area.
    Mr. Davison. I would agree with Mr. Mulloy. In most 
respects, I will differ slightly from his comment in one area. 
I have the utmost trust and respect for the job that our 
current postal officials are doing. I have been very impressed 
as I have gotten to see their work and their approach. I 
believe they are very serious about improving their system. But 
just as we have outside auditors, I do not think it is a bad 
thing to have checks and balances. I like the idea of making 
sure that reports and figures in particular are free from any 
material misstatement; that there hasn't been any incidence of 
improper reserves. There are lots of judgments that go behind 
putting financial statements together. It is good to have an 
outside body, plus consistently applied rules, in our case 
general accounting principles, that help guide that.
    I also think that we have a regulatory process that has 
come under some fire. In some respects, the regulatory process 
has worked in protecting the citizen interests quite well. But 
what I think everybody would agree with is the process has been 
complex and expensive. Part of that is the financial 
transparency issue. It takes a lot of time to get information 
and get data because the system is set up to be litigious and 
confrontational. In a confrontational environment, you do not 
want to lay your cards on the table. So I think that is part of 
the drive that really gets to your question also, Congressman.
    Mr. Davis of Illinois. Let me ask you, we have recently 
found a couple of pots of money, like at the end of the rainbow 
there is a pot of gold. We found it for the Postal Service. I 
mean, what external auditing activity or look-see by others 
maybe would have found that money sooner? Could we perhaps have 
known about it a little sooner?
    Mr. Davison. In a risky statement, I would say that I think 
it probably would have, because I think what has happened, as 
Mr. Davis is saying here, is that the Postal Service over a 
period of time felt unable to challenge some of the numbers 
that were being assigned to it by the government, by the 
Treasury. The reality was that perhaps some additional ability 
to challenge those numbers would have helped unearth the fact 
that they were being incorrectly charged over those very many 
years.
    I think that is the same issue I am raising now with what 
they have done in the appeal to the Board of Actuaries, is that 
they have an outside party that is saying the prior methodology 
is the predominantly used methodology for firms facing the same 
issue of two-employer allocations based on years of service. We 
need to listen to those people when they bring those kinds of 
facts forward, and in fact react to it. That does not mean you 
blindly accept it, but you certainly listen to the learned 
input from outside bodies.
    Mr. Davis of Illinois. I raised the issue earlier relative 
to management. I don't know if either one of you would hazard 
to make any recommendation to the postal system. As we go 
through this process, I do suggest that they have more people 
to be accountable to. I suspect that labor issues are going to 
become a concern as we reconstitute, reform, do whatever it is 
that we do.
    Would you have any recommendations as to how the labor 
issues may get handled as we look at some transformation?
    Mr. Davison. I am not a labor expert. I do not want to 
offer myself as such. But I do think that we have to pull 
everybody into this effort, and all understand where our 
selfish and enlightened best interests lie. It is really not 
about paying people as little as we can pay them. It is about 
having a viable system that brings value and adds value. I 
think the answer to some of the specific labor questions that 
were raised in the Commission's report--I am not an expert, I 
am not familiar enough to understand the alternatives or 
history--but I think it is important that we take a 
comprehensive view and work together to get this issue solved.
    Mr. Mulloy. I would add to that I think that there should 
be a partnership at the table, because what we are trying to 
focus on here is the growth that is inherently present, we 
believe, in the system. Therefore, that is good for labor, it 
is good for management, it is good for the entire institution. 
That builds continuity and longevity in employment. It 
guarantees pension benefits and health care benefits for 
retirees. It is good for all constituencies and all 
stakeholders, if you will, in the business.
    Mr. Davis of Illinois. I guess finally, universal service 
as we have heard it described, I would assume that you all are 
in agreement with that. What about the issue of collective 
bargaining? There are some people who feel that collective 
bargaining puts management at certain kinds of risk, and puts 
even an entire operation at certain kinds of risk. Do we have 
any feelings about that, or any comments that you would venture 
relative to that?
    Mr. Mulloy. I think that the experience would say that 
there is some role for arbitration in the process of 
negotiation. I think that it cannot be an arbitrary 
arbitration. It should be in fact supported by both parties and 
provide some stability to it. I think that a good dialog 
between both parties is the most critical element. I would say 
that based on everything that I have seen in the last few years 
that a positive relationship has been generated between both 
labor and management at the Postal Service. I think there is a 
constructive dialog that is going on today, recognizing both 
the opportunities and challenges that are present. I think that 
if we can put the right sets of reforms in place and your 
committee can help us do that, then I think it creates an 
environment where both parties can have positive and 
constructive dialog, even when there are issues between the 
two.
    Mr. Davis of Illinois. Thank you.
    Mr. Davison. I would concur with that. My goal is to see 
the Postal Service become viable in the future, not to 
eliminate collective bargaining per se. My experience with 
change in an organization is that you have to get everybody on 
board, and this is a very large organization, 750,000 employees 
or so. Change does not happen just because managers decide 
change is going to be occurring. Change happens because the 
people that actually do the work embrace that change and move 
things forward. I think without bringing people on board and 
hearing what they have to say, understanding what their needs 
and concerns are, we are not going to have meaningful change. 
It is just that simple.
    Mr. Davis of Illinois. Gentlemen, I thank you very much for 
your patience, and certainly for your participation. Mr. 
Chairman, I have no further questions, and yield back my time.
    Mr. Schrock. Thank you, Mr. Davis.
    As all of us consider the essential components of 
comprehensive postal reform legislation, what in your views are 
the key areas that we should include in that legislative 
package?
    Mr. Hess. From the nonprofit perspective, it would be rate 
stability. We still prefer some form of indexing, whether it be 
pegged to CPI or inflation or whatever. That is important to 
us.
    Mr. Schrock. Mr. Davison.
    Mr. Davison. From a consumer and marketing perspective, 
even pegging something to inflation is a bit of a concession. 
Lots of product pricing in my industry and others go down 
regularly. So I think we should look for some real cost 
improvement in the system that will make it a more viable 
system and bring more value for the participants.
    I would also add some strong consumer protection or citizen 
mailer protection; some sort of regulatory checks and balances. 
I do not think anybody has been advocating for an unregulated 
monopoly. That is essential, and whatever mechanism you choose 
to employ, there are a variety of them, but some consumer 
protection is absolutely essential.
    Mr. Schrock. Mr. Mulloy.
    Mr. Mulloy. I would just say that there are two that I 
would first and foremost jump on, one of which would be a 
comprehensive and total dealing with all of the retirement 
issues that are on the table, from health care benefits, CSRS, 
the pre-1971/post-1971 issues I raised, and the military. I 
think there are four issues there, all of which can be dealt 
with and there will still be a surplus of funds which then is 
an opportunity for the Postal Service to really embark on a 
true system of reform as outlined by this body.
    The second thing would be that the Postal Service be 
empowered to utilize pricing for what in reality pricing is 
within a business environment, which is an opportunity for 
growth. The most successful retailer in America, one of our 
largest clients, in fact utilizes price reductions as a way of 
encouraging growth. They grow revenue through price reductions 
because they encourage the kinds of behavior that attracts 
market share and performance. We believe that those 
opportunities, and I think the panels have all indicated we see 
growth opportunities in this channel, that mail is an untapped 
potential in terms of growth. Price can become a major 
empowerment to attract growth.
    Mr. Schrock. I have one final question, and it is a 
followup to that question. What do you think we absolutely 
should not include in this postal reform legislation, or what 
areas might best be addressed outside of legislation?
    Mr. Davison. That is a difficult question.
    Mr. Schrock. I did not say it would be easy.
    Mr. Davison. And there are a lot of things that I could 
envision in ways to answer that.
    From my perspective, I guess I would say I think this is 
something that we are going to do every three decades or so, 
and this is going to have lasting import. So I think it is 
important to try to put in place a structure that has some 
permanence, to not try to legislate too many details. In my own 
judgment, to Congressman Davis' question, there is a broader 
constituency here that we need to serve, but that is not a lot 
different than a business serving its customers. So I think we 
have to establish some ground rules and then put some essential 
checks and balances in place, and hopefully the wisdom of those 
folks and the guidance that you provide will allow us to have a 
good, stable, durable system without your having to cover every 
detail.
    Mr. Mulloy. I would kind of suggest that--and I would hope 
that the work of this body would be not looking at the mail 
channel that represents about 9 percent, as you have heard, of 
our gross national product, employs 9 million people--that in 
fact this is not a stressed industry that is going out of 
business, and that we are looking at an inevitable spiral; that 
we in fact come up with a package of reforms that truly 
recognizes there is opportunity for fulfillment in this 
business and that we put things in place that allow it to make 
better business judgments, that will allow it to recognize the 
destiny that is there for the Postal Service and for every one 
of its associates.
    Mr. Schrock. Mr. Hess.
    Mr. Hess. I do not have anything to add to that, Mr. 
Chairman.
    Mr. Schrock. OK, thank you.
    Let me conclude by saying, when I asked to come on this 
panel, I came on this panel with preconceived notions about 
what I thought the Postal Service was and what needed to be 
done. It is kind of interesting, in the three hearings we have 
had, and especially the one we had in Chicago and the one we 
have had today, those preconceived notions have been destroyed, 
because thanks to people like you and the first panel, and the 
wonderful folks we had in Chicago, I think I understand this 
better. I think the more of these hearings we have, the better 
able I am going to be to come to a final conclusion on what is 
best for America and of course what is best for the postal 
system.
    So this has been very, very beneficial to me. I can tell 
you, I thank you all very much. I thank all the witnesses for 
appearing today, and I want to thank the staff who have done a 
magnificent job. These things are not easy to set up, 
especially when you go out of town like we did to the Windy 
City. I say that with all due respect, by the way. I really 
appreciate your efforts as well.
    The record from this hearing will be kept open for 2 weeks 
to allow witnesses to include other information in the record. 
Again, I thank you all and this hearing is now adjourned.
    [Whereupon, at 5:05 p.m. the panel was adjourned, to 
reconvene at the call of the Chair.]
    [Additional information submitted for the hearing record 
follows:]

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