[Senate Hearing 108-]
[From the U.S. Government Publishing Office]



 
  DEPARTMENTS OF TRANSPORTATION, TREASURY AND GENERAL GOVERNMENT, AND 
          RELATED AGENCIES APPROPRIATIONS FOR FISCAL YEAR 2005

                              ----------                              


                        THURSDAY, APRIL 1, 2004

                                       U.S. Senate,
           Subcommittee of the Committee on Appropriations,
                                                    Washington, DC.
    The subcommittee met at 10:03 a.m., in room SD-138, Dirksen 
Senate Office Building, Hon. Richard C. Shelby (chairman) 
presiding.
    Present: Senators Shelby, Stevens, and Murray.

                      UNITED STATES POSTAL SERVICE

STATEMENT OF JOHN POTTER, POSTMASTER GENERAL AND CEO

             OPENING STATEMENT OF SENATOR RICHARD C. SHELBY

    Senator Shelby. Good morning. The committee will come to 
order.
    Today the subcommittee will hear from the United States 
Postmaster General, John Potter. Mr. Potter has testified at a 
number of hearings in the last few months on postal reform, 
terror attacks using mail, and other issues facing the Postal 
Service. It has been several years, however, since the 
subcommittee has had the privilege of receiving testimony from 
the Postmaster General. We are pleased to welcome you here 
today.
    As a vital component of our Nation's economy, it is 
absolutely crucial that the Postal Service maintain its role as 
a Federal Post and maintain the solemn obligation of universal 
service. In doing so, it is undeniable that the Postal Service 
must change and adapt in order to provide an affordable service 
that continues to tie our Nation together.
    Without question, the United States Postal Service has 
confronted some significant changes over the last few years. 
The current business model of the Postal Service is outdated 
and is not economically viable in the 21st century. The 
financial problems have been further complicated since the 
terrorist attacks that used the mail system to deliver 
biological weapons.
    Even as the number of customers and addresses that the 
Postal Service serves has increased, the volume of first class 
mail has dropped steadily since 2001. The Postal Service now 
faces stiff competition from a variety of electronic 
communications options that did not widely exist a few years 
ago, as well as from private sector delivery services. 
Furthermore, postage rate hikes have only caused consumers to 
further rely on alternative means of communications. All of 
these factors have become a self-fulfilling prophecy of future 
postage rate increases to offset the decline in volumes of 
first class mail.
    And as one who believes that a comprehensive Postal Service 
for all Americans, rural and urban, is one of the central 
elements of keeping the country connected, the first class 
revenue and volume dilemma is one we have to address and solve.
    As difficult as these challenges are, the Postal Service is 
also charged with ensuring the safety of the mail. The anthrax 
attacks in 2001 and the more recent attacks using the deadly 
toxin ricin create a daunting overlay on every aspect and 
element of the Postal Service's operation.
    I need not elaborate today any further on the challenge 
this presents to the Postal Service and look forward to hearing 
what steps are being taken to prevent these attacks from 
happening in the future.
    I would also appreciate learning about your plan for 
screening the mail to provide for the safety of Postal 
customers and Postal employees while also ensuring timely 
delivery.
    In the wake of anthrax attacks, Congress provided the 
Postal Service with emergency funding to decontaminate sorting 
facilities and to procure biohazard detection equipment. The 
Postal Service has used this funding to install sensors that 
detect anthrax at several facilities. I have been told, 
however, by the General Accounting Office and others, that the 
system cannot adequately detect other agents.
    I am concerned that the prior investment may be too focused 
on reacting to the last threat and not focused enough on 
detecting other threats.
    The Postal Service submitted a budget request to Congress 
that includes $779 million for emergency preparedness 
activities. This funding, however, was not included in the 
President's budget. I hope you will discuss the next steps for 
the Postal Service and what sort of investment we can expect in 
future years.
    Today, I would also like to discuss the reform plans that 
you have put in place and those legislative reforms that the 
Postal Service is pursuing in order to properly transform 
itself into a self-sustaining enterprise.
    The Postal Service has several advantages that are relevant 
in the 21st century. It is the only delivery service capable of 
reaching every household in America, by providing direct access 
to each and every mailbox. It connects communities, 
particularly those in rural areas. It also presents tremendous 
potential for those mailers who desire to reach 100 percent of 
the population in a given community or area.
    I look forward to hearing your thoughts, Mr. Potter, on how 
best to leverage these and other of the Postal Service's unique 
attributes into increase revenues and market growth.
    The Postal Service has been granted significant relief from 
its retirement obligations through the recently enacted Postal 
Service Retirement System Funding Reform Act. I would 
appreciate hearing your perspective on how the Postal Service 
expects to utilize these newly available resources.
    As part of any serious reform effort, the Postal Service 
must improve its focus on its core services. It has not been an 
effective competitor in commercial activities that are 
unrelated to its traditional responsibilities, and these forays 
have diverted funds from other necessary expenses.
    In addition, the post office must not lose sight of its 
efforts to control its costs. I commend the Postmaster General 
for streamlining the workforce by 10 percent over the last 5 
years without layoffs. This is a good start, but more cost-
cutting measures will be needed to reshape the Postal Service 
into a self-sustaining, commercially viable enterprise.
    We have basically two tracks that we can take. We can 
either do things better or do things differently. We hear time 
and again about processes that private businesses have put in 
place to become more competitive. Perhaps now we should find 
ways to challenge the Postal Service to bring their costs in 
line with what is offered in the domestic marketplace.
    And, perhaps now is the time to pursue reforms and 
performance measures that focus the Postal Service on those 
things that no one else can do and encourage American 
businesses to provide those services that they can do better.
    The Revenue Foregone Reform Act of 1993 retains free 
postage for visually impaired customers and for overseas 
absentee balloting materials. To pay for these services, the 
Act provides for an annual $29 million appropriation to 
continue through 2035. Since 1994, the Postal Service has used 
this annual appropriation to pay off debt accumulated in the 
early 1990s. In reviewing the administration's budget request, 
I found that no funds were provided.
    In recent years, some have suggested that the Postal 
Service should reduce its days of operation, as well as the 
scope of its service to rural areas of the country, in order to 
cut costs. I am heartened that you and the Service have 
steadfastly resisted such short-sighted so-called reforms. In 
the course of your testimony today, I hope that you will renew 
your commitment to maintaining universal 6-day-a-week service.
    Mr. Postmaster General, as encouraged as I am by your 
defense of affordable universal service, I am concerned that 
the current moratorium on new construction has left many 
communities without adequate facilities for the dispatch and 
delivery of U.S. mail. For universal service to be meaningful, 
it must be reasonably accessible and convenient for customers.

                           PREPARED STATEMENT

    It is my express hope that you will, today, outline the 
Postal Service's plan for again investing in the communities to 
which its service and presence are so vital and for innovative 
arrangements to keep the rural communities connected to the 
post office.
    Again, I want to welcome you to the subcommittee and look 
forward to discussing the important matters during the question 
and answer period.
    Senator Murray.
    [The statement follows:]
            Prepared Statement of Senator Richard C. Shelby
    Good morning. Today the subcommittee will hear from the United 
States Postmaster General John Potter.
    Mr. Potter has testified at a number of hearings in the last few 
months on postal reform, terror attacks using mail, and other issues 
facing the Postal Service. It has been several years, however, since 
the subcommittee has had the privilege of receiving testimony from the 
Postmaster General, and we are pleased to welcome you.
    As a vital component of our Nation's economy, it is absolutely 
crucial that the Postal Service maintain its role as the Federal Post 
and maintain the solemn obligation of universal service. In doing so, 
it is undeniable that the Postal Service must change and adapt in order 
to provide an affordable service that continues to tie our Nation 
together.
    Without question, the United States Postal Service has confronted 
some significant challenges over the last few years. The current 
business model of the postal service is outdated and is not 
economically viable in the 21st century. The financial problems have 
been further complicated since the terrorist attacks that used the mail 
system to deliver biological weapons.
    Even as the number of customers and addresses that the Postal 
Service serves has increased, the volume of first class mail has 
dropped steadily since 2001.
    The Postal Service now faces stiff competition from a variety of 
electronic communications options that did not widely exist a few years 
ago as well as from private sector delivery services.
    Furthermore, postage rate hikes have only caused consumers to 
further rely on alternative means of communications.
    All of these factors have become a self-fulfilling prophecy of 
future postage rate increases to offset the declining volume of first 
class mail. And, as one who believes that a comprehensive postal 
service for all Americans--rural and urban--is one of the central 
elements of keeping the country connected, this first class revenue and 
volume dilemma is one we have to address and solve.
    As difficult as these challenges are, the Postal Service is also 
charged with ensuring the safety of the mail. The anthrax attacks in 
2001 and the more recent attacks using the deadly toxin ricin create a 
daunting overlay on every aspect and element of the Postal Service's 
operation.
    I need not elaborate any further on the challenge this presents to 
the Postal Service and look forward to hearing what steps are being 
taken to try to prevent these attacks from happening in the future. I 
would also appreciate learning about your plan for screening the mail 
to provide for the safety of Postal customers and Postal employees 
while also ensuring timely delivery.
    In the wake of the anthrax attacks, Congress provided the Postal 
Service with emergency funding to decontaminate sorting facilities and 
to procure biohazard detection equipment. The Postal Service has used 
this funding to install sensors that detect anthrax at several 
facilities.
    I have been told, however, by the General Accounting Office and 
others that the system cannot adequately detect for other agents. I am 
concerned that the prior investment may be too focused on reacting to 
the last threat and not focused enough on detecting other threats.
    The Postal Service submitted a budget request to Congress that 
includes $779 million for emergency preparedness activities. This 
funding, however, was not included in the President's budget. I hope 
you will discuss the next steps for the Postal Service and what sort of 
investment we can expect in future years.
    I would also like to discuss the reform plans that you have put in 
place and those legislative reforms that the Postal Service is pursuing 
in order to properly transform itself into a self-sustaining 
enterprise.
    The Postal Service has several advantages that are relevant in the 
21st century. It is the only delivery service capable of reaching every 
household in America, by providing direct access to each and every 
mailbox.
    It connects communities, particularly those in rural areas. It also 
presents tremendous potential for those mailers who desire to reach 100 
percent of the population in a given community or area.
    I look forward to hearing your thoughts, Mr. Potter, on how best to 
leverage these and other of the Postal Services' unique attributes into 
increased revenues and market growth.
    The Postal Service has been granted significant relief from its 
retirement obligations through the recently-enacted Postal Civil 
Service Retirement System Funding Reform Act. I would appreciate 
hearing your perspective on how the Postal Service expects to utilize 
these newly available resources.
    As part of any serious reform effort, the Postal Service must 
improve its focus on its core services. It has not been an effective 
competitor in commercial activities that are unrelated to its 
traditional responsibilities, and these forays have diverted funds from 
other necessary expenses.
    In addition, the post office must not lose sight of its efforts to 
control its costs. I commend the Postmaster General for streamlining 
the workforce by 10 percent over the last 5 years, without layoffs. 
This is a good start, but more cost-cutting measures will be needed to 
reshape the Postal Service into a self-sustaining, commercially viable 
enterprise.
    We have basically two tacts we can take. We can either do things 
better or do things differently. We hear time and time again about 
processes that private businesses have put in place to become more 
competitive.
    Perhaps now we should find ways to challenge the postal service to 
bring their costs into line with what is offered in the domestic 
marketplace. And, perhaps now is the time to pursue reforms and 
performance measures that focus the Postal Service on those things that 
no one else can do and encourage American businesses to provide those 
services that they can do better.
    The Revenue Forgone Reform Act of 1993 retains free postage for the 
visually impaired customers and for overseas absentee balloting 
materials. To pay for these services, the Act provides for an annual 
$29 million appropriation to continue through 2035. Since 1994, the 
Postal Service has used this annual appropriation to pay off debt it 
accumulated in the early 1990's. In reviewing the administration's 
budget request, I found that no funds were provided.
    In recent years, some have suggested that the postal service should 
reduce its days of operation as well as the scope of its service to 
rural areas of the country in order to cut costs. I am heartened that 
you and the Service have steadfastly resisted such short-sighted so-
called reforms.
    In the course of your testimony today, I hope that you will renew 
your commitment to maintaining universal, 6-day-a-week service.
    Mr. Postmaster General, as encouraged as I am by your defense of 
affordable universal service, I am concerned that the current 
moratorium on new construction has left many communities without 
adequate facilities for the dispatch and delivery of U.S. mail. For 
universal service to be meaningful, it must be reasonably accessible 
and convenient for customers.
    It is my express hope that you will, today, outline the Postal 
Service's plan for again investing in the communities to which its 
service and presence are so vital and for innovative arrangements to 
keep the rural communities connected through the Post Office.
    Again, I welcome you before the subcommittee today and look forward 
to discussing these important matters during the question-and-answer 
period.
    With that, I yield to Senator Murray for her opening statement.

                   STATEMENT OF SENATOR PATTY MURRAY

    Senator Murray. Thank you, Mr. Chairman.
    This is our subcommittee's first hearing with the Postal 
Service since we took over appropriations jurisdiction for this 
critical Federal agency.
    I want to welcome the Postmaster General, John Potter, to 
the subcommittee. Mr. Potter is a true American hero. He worked 
his way up from the most junior ranks at the Postal Service to 
become the Postmaster General.
    Today the Postal Service faces unprecedented challenges as 
it seeks to cover its expenses through the postal revenues paid 
by the public. The same technologies that helped make our 
country more productive have undermined the financial 
foundation of the United States Postal Service.
    Today first class mail represents less than half of the 
volume of mail delivered by the post office. At the same time, 
mail service revenues continue to decline year after year.
    Many of the technological advances that have allowed our 
citizens to avoid first class mail were developed in my home 
State of Washington. Even so, I am concerned that we be 
attentive to the critical role that the Postal Service plays in 
all of our communities. The Postal Service's existing business 
model is now viewed as unsustainable.
    Some of the alternatives being considered are ending mail 
service to all rural addresses and ending mail delivery on 
Saturdays. For high tech households in urban areas like Seattle 
that may be fine. They can pay their bills online and 
communicate through PDA's, e-mails and cell phones. But that 
alternative is certainly not acceptable to retirees living on 
fixed incomes in Pend Orielle County or Klickitat County in 
Washington. They may be waiting on their Saturday mail delivery 
to get their Social Security check or their prescription drugs.
    We have got to be attentive to the ways that these proposed 
changes would affect all of our citizens in all of our 
communities.
    In his formal opening statement, Postmaster Potter will 
discuss the fact that the Department of Homeland Security and 
the Department of Health and Human Services are developing a 
plan through which our Nation's letter carriers can be called 
on to deliver antibiotics to Americans in the event of a 
catastrophic incident involving a biological agent.
    This plan highlights the fact that our Postal Service is a 
critical standing army that touches all American households in 
all Congressional districts 6 days a week, no matter how rural, 
how isolated or how poor those households may be. We should 
take great care before we sacrifice this ready and able Federal 
force. We cannot envision today every reason why we may need 
them in the future. After all, before September 11th, 2001 we 
never envisioned the need for our Postal Service to perhaps 
deliver emergency vaccines in the event of a biological 
emergency.

                           PREPARED STATEMENT

    So I hope our subcommittee will be attentive to the very 
real appropriations needs that will be articulated by the 
Postmaster this morning. In many cases, the needs of the Postal 
Service have been ignored by the Bush Administration's fiscal 
year 2005 budget request. For the first time ever, the Bush 
Administration is not even requesting funds to honor the 
Federal commitment to the Revenue Foregone Act of 1993. In 11 
years no president has zeroed out funding for this activity. So 
here, as in many areas, the subcommittee may need to chart its 
own path to ensure that all Americans in all regions of the 
country are joined together through a vibrant and effective 
postal system.
    Thank you, Mr. Chairman.
    [The statement follows:]
               Prepared Statement of Senator Patty Murray
    Thank you, Mr. Chairman. This is our subcommittee's first hearing 
with the Postal Service since we took over appropriations jurisdiction 
for this critical Federal agency.
    I want to welcome the Postmaster General, John Potter, to the 
subcommittee. Mr. Potter represents a true American hero. He worked his 
way up from the most junior ranks of the Postal Service to become the 
Postmaster General.
    Today the Postal Service faces unprecedented challenges as it seeks 
to cover its expenses through the postal revenues paid by the public.
    The same technologies that have helped make our country more 
productive have undermined the financial foundation of the United 
States Postal Service.
    Today, first class mail represents less than half of the volume of 
mail delivered by the Postal Service. At the same time, mail service 
revenues continue to decline year after year.
    Many of the technological advances that have allowed our citizens 
to avoid first class mail were developed in my home State of 
Washington. Even so, I am concerned that we be attentive to the 
critical role that the Postal Service plays in all of our communities.
    The Postal Service's existing business model is now viewed as 
unsustainable. Some of the alternatives being considered are ending 
mail service to all rural addresses and ending mail delivery on 
Saturdays.
    For high tech households in urban areas like Seattle, that may be 
fine. They can pay their bills online and communicate through PDA's, 
email, and cell phones.
    But that alternative is certainly not acceptable to retirees living 
on fixed incomes in Pend Oreille County or Klickitat County in 
Washington.
    They may be waiting on their Saturday mail delivery to get their 
Social Security check or their prescription drugs. We've got to be 
attentive to the ways that these proposed changes would affect all of 
our citizens in all communities.
    In his formal opening statement, Postmaster Potter will discuss the 
fact that the Department of Homeland Security and the Department of 
Health and Human Services are developing a plan through which our 
Nation's letter carriers can be called on to deliver antibiotics to 
Americans in the event of a catastrophic incident involving a 
biological agent.
    This plan highlights the fact that our Postal Service is a critical 
standing army that touches all American households in all congressional 
districts 6 days a week, no matter how rural, how isolated or how poor 
those households may be.
    We should take great care before we sacrifice this ready and able 
Federal force. Today, we can't envision every reason why we may need 
them in the future.
    After all, before September 11, 2001, we never envisioned the need 
for our Postal Service to perhaps deliver emergency vaccines in the 
event of a biological emergency.
    So I hope our subcommittee will be attentive to the very real 
appropriations needs that will be articulated by the Postmaster this 
morning.
    In many cases, the needs of the Postal Service have been ignored by 
the Bush Administration's fiscal year 2005 budget request.
    Indeed for the first time ever, the Bush Administration is not even 
requesting funds to honor the Federal commitment to the Revenue 
Foregone Act of 1993. In 11 years, no president, including the current 
president's father, has zeroed out funding for this activity.
    So, here as in so many areas, the subcommittee may need to chart 
its own path to ensure that all Americans in all regions of the country 
are joined together through a vibrant and effective postal system.
    Thank you, Mr. Chairman.

    Senator Shelby. Mr. Postmaster General, your written 
statement will be made part of the record in its entirety. We 
have reviewed that. You proceed as you wish. Welcome again to 
the committee.

                      STATEMENT OF JOHN E. POTTER

    Mr. Potter. Thank you, Mr. Chairman.
    Good morning to you and to Senator Murray.
    I appreciate this opportunity to speak with you today about 
the Postal Service, its accomplishments over the past years and 
our appropriations request for the next fiscal year. You have 
my detailed testimony, as the Chairman said, so I will keep my 
remarks brief.
    My thanks to the subcommittee for its support of the Civil 
Service Retirement System legislation that was enacted last 
year. We continue to work with the Congress on two open issues: 
the escrow account and military retirement provisions. We hope 
they will both be resolved as soon as possible.
    The legislation has helped our customers by providing for 
stable rates until 2006. Stable rates and strong service 
performance are key elements to enable the mailing industry to 
stabilize and grow again. I remain committed to a strong 
customer focus. I remain committed to a Postal Service that is 
financially strong. We continue to aggressively manage the 
business. We are doing more and doing it better with less.
    Last year we added more than 1.7 million new addresses to 
our delivery network. Service performance and customer 
satisfaction reached their highest levels ever. Total factor 
productivity grew for an unprecedented fourth straight year. We 
remain on schedule to remove at least $5 billion from our 
annual operating costs over the 5-year period ending in 2006. 
Internally, key indicators point to an improving work place 
environment.
    Yet these successes mask a marketplace that continues to 
show signs of long-term erosions. In 2003 First Class volume 
fell by more than 3 billion pieces of mail. We have seen First 
Class continue its decline this year as well.
    It is clear that the Postal Service can no longer rely on a 
limited monopoly that assumed rising mail volumes would offset 
the costs of an ever-expanding delivery network. At the end of 
the day that means the level of universal service that America 
enjoys is in jeopardy unless we all act now.
    I encourage the Congress to continue to explore new models 
that will lead to modern day management flexibility in how we 
operate.
    As the reform process continues to unfold we are here today 
to address more immediate needs and to submit our appropriation 
request for fiscal year 2005.
    Our first request is for $29 million for revenue foregone 
reimbursements to cover the cost of services we provided from 
1991 through 1998. This will be the 12th of 42 interest-free 
payments. The administration's budget submission for 2005 does 
not include provision for this statutory reimbursement. Failure 
to receive these funds may require us to treat the remaining 
payments of nearly $900 million as bad debt. That would put 
upward pressure on our rate structure.
    The second part of our request is for $75.9 million. This 
request provides funding for the free mailing of materials used 
by the blind and other handicapped persons. It also includes 
funding for absentee balloting materials that can be mailed 
free by members of the armed forces and other U.S. citizens 
residing outside the United States.
    The administration proposes $61.7 million and continues the 
practice where reimbursement is not made until the fiscal year 
after the mailings have been handled and delivered.
    The third part of our appropriation request is for homeland 
security preparedness costs of $779 million. We gratefully 
acknowledge the funding previously given to us for this 
purpose. Those funds enabled us to accelerate implementation of 
our emergency preparedness plan which was submitted to Congress 
in 2002, and which we updated last spring.
    The previous appropriation of $587 million enabled us to 
provide personal protective equipment for our employees, to 
provide equipment and facilities to treat mail for the 
legislative, executive and judicial branches of government to 
neutralize any biohazards that may exist in that mail, to 
undertake decontamination of major mail processing facilities 
in Washington, DC and Trenton, New Jersey, and the development, 
testing and purchase of state-of-the-art biohazard detection 
and ventilation and filtration systems for deployment to 282 
mail processing facilities in every State in the union.
    The task ahead of us is both costly and critical to the 
safety of our employees and the millions of Americans who rely 
on the mail day in and day out to build their businesses and 
stay connected with families and loved ones. I believe it is 
imperative that we continue the work we have already begun on 
homeland security.
    The funds we request will enable us to complete that work. 
Specifically, the funding will support the full deployment of 
the biohazard detection system, the ventilation and filtration 
system and the construction of a Washington-based mail 
irradiation facility.
    Our request covers only the capital expenses of obtaining 
this equipment. After initial deployment, operation and 
maintenance will become part of the Postal Service's normal 
operating expenses.
    At the same time, we recognize that the threat of 
bioterrorism is pervasive, that the threats we face today may 
be far different than in the future. With that knowledge, we 
continue to evaluate technologies that offer protection from 
other hazards.
    I wish these funds were not necessary. But as we learned 
from the anthrax attacks and the recent ricin incidents, the 
threats remain real.
    In a democratic society marked by free and open 
communications, there will always be the possibility that some 
person or group will use the mail's unequaled tradition of 
privacy to mask an agenda of hate and destruction. As a Nation, 
we must be prepared to do what is necessary to neutralize the 
threat to the extent possible.
    We are more than willing to do our part on this war on 
terrorism. We are working with first responders as we deploy 
bioterrorism systems. In community after community we are 
acting as a catalyst to create dialogue and establish protocols 
consistent with standardized Federal response procedures. This 
is an important role that can save lives in the event of any 
future real attacks.
    In addition, the Postal Service's efforts to contribute to 
homeland security were advanced by a joint agreement with the 
Department of Health and Human Services and the Department of 
Homeland Security. In the event of a catastrophic biological 
incident, our letter carriers would voluntarily deliver 
antibiotics to affected Americans. The procedures we develop 
will augment and not replace those of local communities.

                           PREPARED STATEMENT

    Finally Mr. Chairman, I want to add that although we are 
authorized by statute to request an annual public service 
appropriation of up to $460 million, we have not made that 
request since 1982 and I am pleased to say we are not 
requesting that appropriation for fiscal year 2005.
    Thank you, Mr. Chairman. I will be pleased to respond to 
any questions you may have.
    [The statement follows:]

                  Prepared Statement of John E. Potter

    Good morning, Mr. Chairman and Members of the subcommittee.
    I appreciate this opportunity to speak with you today about the 
Postal Service, its accomplishments over the past years and our 
appropriations request for the next fiscal year. You have my detailed 
testimony, so I will keep these remarks brief.
    My thanks to the subcommittee for its support of the Civil Service 
Retirement System legislation that was enacted last year. We continue 
to work with Congress on two open issues--the escrow account and 
military retirement provisions. We hope they will both be resolved as 
soon as possible.
    The legislation has helped our customers by providing for stable 
rates until 2006.
    Stable rates and strong service performance are key elements to 
enable the mailing industry to stabilize and grow again.
    I remain committed to a strong customer focus, and I remain 
committed to a Postal Service that is financially strong. We continue 
to aggressively manage the business.
    We are doing more--and doing it better--with less. Last year, we 
added more than 1.7 million new addresses to our delivery network. 
Service performance and customer satisfaction reached their highest 
levels.
    Total factor productivity grew for an unprecedented fourth straight 
year. We remain on schedule to remove at least $5 billion from our 
annual operating costs over the 5-year period ending in 2006.
    Internally, key indicators point to an improving workplace 
environment.
    Yet these successes mask a marketplace that continues to show signs 
of long-term erosion. In 2003, First-Class volume fell by more than 3 
billion pieces. We've seen First-Class continue its decline this year 
as well.
    It is clear that the Postal Service can no longer rely on a limited 
monopoly that assumed rising mail volumes would offset the costs of an 
ever-expanding delivery network. At the end of the day, that means the 
level of universal service that America enjoys is in jeopardy unless we 
all act now.
    I encourage the Congress to continue to explore new models that 
will lead to modern-day management flexibility in how we operate.
    As the reform process continues to unfold, we are here today to 
address more immediate needs and to submit our appropriations request 
for fiscal year 2005.
    Our first request is for $29 million for revenue foregone 
reimbursements to cover the cost of services we provided from 1991 
through 1998.
    This would be the twelfth of 42 interest-free payments. The 
administration's budget submission for 2005 does not include provision 
for this statutory reimbursement.
    Failure to receive these funds may require us to treat the 
remaining payments of nearly $900 million as a bad debt. That would put 
upward pressure on our rate structure.
    The second part of our request is for $75.9 million. This request 
provides funding for the free mailing of materials used by the blind. 
It also includes funding for absentee balloting materials that can be 
mailed free by members of the Armed Forces and other U.S. citizens 
residing outside the overseas.
    The administration proposes $61.7 million, and continues the 
practice where reimbursement is not made until the fiscal year after 
the mailings have been handled and delivered.
    The third part of our appropriations request is for homeland 
security preparedness costs of $779 million.
    We gratefully acknowledge the funding previously given to us for 
this purpose. Those funds enabled us to accelerate implementation of 
our Emergency Preparedness Plan which was submitted to Congress in 2002 
and which we updated last spring. The previous appropriation of $587 
million enabled us to:
  --Provide personal protective equipment for our employees;
  --To provide equipment and facilities to treat mail for the 
        legislative, executive and judicial branches of government to 
        neutralize any biohazards that may exist;
  --To undertake decontamination of major mail processing facilities in 
        Washington DC, and Trenton, New Jersey and,
  --The development, testing, and purchase of state-of-the-art 
        biohazard detection and ventilation, filtration equipment for 
        deployment to 282 mail processing facilities in every State of 
        the union.
    The task ahead of us is both costly and critical to the safety of 
our employees and the millions of Americans who rely on the mail day in 
and day out to build their businesses and to stay connected with 
families and loved ones.
    I believe it is imperative that we continue the work we've already 
begun to support homeland security. The funds we request will enable us 
to complete that work.
    Specifically, the funding will support the full deployment of the 
Biohazard Detection System, the Ventilation and Filtration System, and 
the construction of a Washington-based mail-irradiation facility.
    Our request covers only the capital expense of obtaining this 
equipment. After initial deployment, operation and maintenance would 
become part of the Postal Service's normal operating expenses.
    At the same time, we recognize that the threat of bioterrorism is 
pervasive--that the threats we face today may be far different in the 
future. With that knowledge, we continue to evaluate technologies that 
offer protection from other hazards.
    I wish these funds were not necessary, but as we learned from the 
anthrax attacks and the three recent ricin incidents, the threats 
remain real.
    In a democratic society marked by free and open communications, 
there will always be the possibility that some person or group will use 
the mail's unequalled tradition of privacy to mask an agenda of hate 
and destruction. As a Nation, we must be prepared to do what is 
necessary to neutralize the threat to the extent possible.
    We are more than willing to do our part on this war on terrorism. 
We are working with first responders as we deploy bioterrorism systems. 
In community after community, we are acting as a catalyst to create 
dialogue and establish protocols consistent with standardized Federal 
response procedures.
    This is an important role that can save lives in the event of any 
future real attacks.
    In addition, the Postal Service's efforts to contribute to homeland 
security were advanced by a joint agreement with the Department of 
Health and Human Services and the Department of Homeland Security.
    In the event of a catastrophic biological incident, our letter 
carriers would voluntarily deliver antibiotics to affected Americans. 
The procedures we develop will augment--not replace--those of local 
communities.
    Finally, Mr. Chairman, I want to add that although we are 
authorized by statute to request an annual public service appropriation 
of up to $460 million, we have not made that request since fiscal year 
1982. And I am pleased to say that we are not requesting that 
appropriation for fiscal year 2005.
    Thank you, Mr. Chairman. I will be pleased to respond to any 
questions.

                         EMERGENCY PREPAREDNESS

    Senator Shelby. I want to discuss emergency preparedness 
expenses if I could.
    Since 2002, Congress has provided emergency appropriations 
to support the Postal Service's anthrax emergency preparedness 
activities. After the attacks, the Congress appropriated $762 
million to decontaminate postal buildings and to buy and 
install biohazard detection equipment. The Postal Service 
reportedly has spent a total of $971 million on emergency 
preparation, which includes $209 million from its revenue.
    Provide us an overview, briefly, of what this funding has 
been spent on to date. In other words, give us an accounting.
    Mr. Potter. The funding has been spent on--$268 million of 
it has been spent for building restoration; $402 million has 
been spent for biodetection systems; $271 million has been 
spent on ventilation and filtration systems; $9 million will be 
spent on a D.C. area irradiation facility. We have not 
committed to that. We are doing some environmental assessments 
but our intent is to spend it on that.
    Senator Shelby. How much will that cost, roughly?
    Mr. Potter. It will cost roughly $16 million. But we have 
bought the equipment to irradiate the mail and that is the $9 
million of expense that we have. Our intent is to do it on the 
campus of the Brentwood facility, on the grounds of the 
Brentwood facility.
    Senator Shelby. Since your emergency preparedness plan was 
submitted last spring, what additional steps have you taken to 
prepare for another attack if there is one? We hope there is 
never another one.
    Mr. Potter. One of the things that we are constantly doing, 
Mr. Chairman, is looking at other technologies that might be 
out there. Today we have a test underway for chemi-
luminescence. That is a test that will not only detect 
biohazards as the polymer rays----
    Senator Shelby. Will that detect chemicals?
    Mr. Potter. It will detect chemical. It will be able to 
detect ricin, biological and chemical, as well.
    And we have designed our system----
    Senator Shelby. How is the technology coming along? Are you 
testing it?
    Mr. Potter. We are testing that as we speak. We are using 
the Department of Defense to help us with those tests. We have 
designed our biodetection system to be flexible enough to add 
new technologies to that system.
    So our base system is there. We are excited about the new 
technologies that are coming down, that appear to be on the 
horizon, and we are actively testing those that show promise. 
And we are doing that with the appropriate Federal agencies.
    Senator Shelby. You submitted a request for $779 million to 
install biodetection equipment and to improve ventilation and 
filtration systems at postal facilities. Why is the Postal 
Service having difficulty with OMB getting that approved?
    Mr. Potter. I believe that they understand the need for it. 
Obviously there are--given the fact that the country is at war, 
there are a number of priorities. And I believe that, in terms 
of their priorities and their immediate needs, they have made a 
decision about where that stands for fiscal year 2005.
    We wrote a letter of appeal to OMB when we heard about 
their decision because we believe that there is a need to 
provide these systems throughout the country to protect all 
communities.
    Senator Shelby. You have been quoted as saying that funding 
for biohazard detection equipment is either going to come 
through an appropriation or rate increase. Is that the only 
choice you have? Or do you have money that you could get out of 
your escrow fund?
    Mr. Potter. The only ways that the Postal Service can 
obtain money is through appropriations or through the rates 
process. So any cost, whatever it is, for the Postal Service, 
if it is not appropriated by Congress--and there are very 
limited amounts of funds that are appropriated by Congress, $29 
million and the monies for the blind--the only way we have to 
raise money is through rates.
    Now I am not saying that this would mean that we have to 
raise rates tomorrow, but the funds would have to come through 
the rates process at some point in time in the future.
    Senator Shelby. Detecting biohazards in the mail is the 
next subject I want to raise. We have been told by the GAO and 
others that the detecting systems that the Postal Service has 
acquired may not have the capability to detect other hazardous 
agents such as chemical or a radiological weapon. Would you 
explain the capabilities of these systems that you are getting?
    Mr. Potter. The current system that we are----
    Senator Shelby. But you want to spend money wisely, and I 
know you do.
    Mr. Potter. We are spending it wisely. But we also 
recognize there is an immediate need to move.
    Senator Shelby. You have got to be thinking of the future. 
What else is out there, right?
    Mr. Potter. Exactly. So we believe our system can be 
augmented. And we have designed a system that is flexible 
enough to add new technologies to it.
    So today we can detect DNA. Our systems are designed to 
detect DNA or measure DNA or look at DNA. Our system today can 
do that.
    We are working with the appropriate authorities to 
determine what other threats are out there that might be of a 
bio-nature. And we can add up to 10 agents being detected with 
the current system.
    In addition to that, we are looking at electro-
chemiluminescence as an opportunity down the road to be able to 
now detect chemical or toxins. And it appears to be promising 
but we have to await the tests before we move on it.

                           PERFORMANCE GOALS

    Senator Shelby. Performance measures. The European Union 
has agreed to a standard of 85 percent of cross-border letter 
mail must be delivered in 3 days and 97 percent must be 
delivered in 5 days. Has the Postal Service established similar 
performance goals? And if you have not, do you contemplate it? 
And what are the standards used by the Postal Service to 
determine if the performance goals are being met?
    Mr. Potter. The goals of the European Community have been 
shared and are measuring themselves against what was formed as 
part of the International Postal Corporation. The Postal 
Service is a member of that group. We do measure performance 
within a small community of nations, European, Canada and the 
Postal Service. The UPU, the United Nations Universal Postal 
Union is having a big meeting this year where they are going to 
discuss the notion of expanding what has been done within the 
IPC to the rest of the world. We certainly will embrace the 
notion of putting standards amongst the countries of the world.
    Obviously there are some Third World countries that would 
have problems meeting such a standard. But the Postal Service, 
the United States Postal Service, is engaged through the UPU in 
discussions on increasing the standards for delivery of mail 
throughout the world.
    Senator Shelby. Are you going to those same standards? And 
if so, when do you think you will be doing that for the 
delivery of mail?
    Mr. Potter. Right now within the IPC we are, for those 
communities. But it is not measured--beyond that small group of 
nations--mail is not measured.
    Senator Shelby. Let us talk about the United States of 
America. Let us say from Seattle, Washington to Portland, 
Maine. What is the average first class delivery on that?
    Mr. Potter. The standard is 3 days and we are achieving 
that, about a 90 percent on-time delivery.
    If you look at the United States, our overnight area which 
is generally within about 100 to 150 miles of an origin, our 
goal is overnight service. Right now we are achieving 95 
percent.
    Within 500 or 600 miles is our 2-day standard. We are 
achieving a little over 90 percent. Three-day nationwide, our 
goal for areas beyond 600 miles, our goal is 3 days. Last 
quarter we achieved a 90 percent. This quarter we are at about 
an 88 percent. The reason for the decline is the weather that 
we have experienced and the shutdown of airports around the 
country.
    Senator Shelby. What would be the average mail performance 
of first class mail from Atlanta, Georgia to Birmingham, 
Alabama? It is about 150 miles.
    Mr. Potter. It would probably be a 2-day standard and I can 
give you specifically in a follow-up what the actual 
achievement was. I would be guessing at best if I attempted to 
tell you. I hope it is very high, though.
    [The information follows:]

    A First-Class letter mailed from Birmingham, AL, to Atlanta, GA, is 
delivered in 2 days. During the first quarter of fiscal year 2004, 
First-Class Mail destined for overnight delivery in Alabama was 
delivered on time 93 percent of the time.

    Senator Shelby. I was going to use Spokane, Washington to 
Seattle. What is the delivery time there from Spokane to 
Seattle? I hope about half a day.

                            COST REDUCTIONS

    Cost reductions. Would you touch on cost reduction measures 
for just a minute? And also, how do you intend to implement the 
process of streamlining the Postal Service's operations?
    Mr. Potter. The first thing that we have done nationwide is 
to standardize our operations.
    Senator Shelby. What do you mean by standardize?
    Mr. Potter. By standardize I mean what we have done is we 
have benchmarked internally against ourselves and we have 
identified the top quartile of performers in the country in any 
operation, whether it is sorting mail, canceling mail. And what 
we have done is we have looked at the best practice--and we 
have done this about 3 years ago.
    We looked at what the best practices were that enabled them 
to be in the top quartile. We then, in turn, shared that 
throughout the country and said these are the practices that 
work, here is an expectation of how you should perform. And we 
set targets for improvement year by year.
    What you have seen is a continuous improvement in 
productivity throughout the country. You have seen us be able 
to not replace work force that we had habitually just replaced, 
as people leave, we replaced them. For every three people that 
leave the Postal Service we replace one. And largely it is 
because of the opportunity to improve productivity.
    We have also gone back and looked at all of our carrier 
routes to determine whether or not the 8-hour job that this 
route was based upon is still 8 hours. With the decline in mail 
volume over the years, what has happened is the average 
delivery in America which as recently as the year 2000 was 
reaching 1,870 pieces of mail per year, that has declined to 
1,700 pieces of mail per year.
    Senator Shelby. What percentage of those 1,700 is first 
class mail?
    Mr. Potter. Just slightly less than half.
    And so as a result of the decline in volume per delivery, 
that has reduced the workload for a carrier and has enabled us 
to go back in and reconfigure those routes so they have more 
deliveries.
    So it is those kind of just basic practices that have 
enabled us to streamline and lower our costs.
    In addition to that, we have been very careful about the 
purchase of goods and services. Over the last 3 years we have 
reduced our annual spending on goods and services by $1 
billion. So any time a truck route comes up for rebid, we 
review it. A lease for a facility, we review it and look at our 
needs and determine whether or not it is the most economical 
way to go.
    Senator Shelby. Have you saved a lot of money that way?
    Mr. Potter. We have saved over $1 billion in our base per 
year.
    Senator Shelby. How many years have you been associated 
with the postal system?
    Mr. Potter. Me, personally? Twenty-five.
    Senator Shelby. So you have done just about every job?
    Mr. Potter. Pretty much, yes.
    Senator Shelby. Thank you.
    Senator Murray.

                         APPROPRIATIONS REQUEST

    Senator Murray. Thank you, Mr. Chairman.
    As the Chairman referred to, on security and emergency 
preparedness efforts, it is a big undertaking and one that is 
necessary so that our mail workers can be protected and the 
mail processing and deliveries will be as safe as possible.
    Congress was able to provide some initial funding in the 
amount of $762 million. Last year you requested $350 million, 
not even a dollar of which this subcommittee was able to 
provide.
    This year you are requesting $779 million, which includes 
the 2005 request of $429 million plus the 2004 request that was 
not funded.
    If we are to do anything in support of this request it must 
be exempt from the spending cap set forth in the budget 
resolution. In other words, the only way to provide this 
funding would be if it were declared an emergency.
    You did not receive any appropriations last year for 
emergency preparedness and you were still able to proceed with 
anthrax decontamination and are now proceeding with plans to 
put in place biodetection devices in all of your plants. If 
that is the case, why are you asking for funding?
    Mr. Potter. Because when the initial funding was provided, 
it was noted that it was an extraordinary circumstance that 
surrounded this whole biohazardous-material-in-the-mail issue. 
And at the time, the Congress said that it was providing 
funding because of these specific security concerns and the 
Congress's notion that they wanted to help protect the mail 
system from biohazards.
    So consistent with that sentiment that was expressed a 
couple of years ago, we feel that we have continued down that 
path and asked for the funds again simply for the capital 
portion of these systems, with the Postal Service picking up 
the operating expenses. So again, we are responding to the 
sentiment of the Congress in the past and we would hope that it 
would continue on into the future.

                      BIOHAZARD DETECTION SYSTEMS

    Senator Murray. The biodetection systems that you referred 
to a few minutes ago that you are planning to install to detect 
anthrax, do you have an estimate yet on how much it would cost 
to retrofit the machines to detect ricin or other toxins?
    Mr. Potter. We believe that they can be retrofitted. Our 
estimates are, if we move to the new technology, we could do it 
within the $779 million because of the fact that we have not 
fully deployed these systems and we can reduce the amount of 
the systems that we would have to deploy. So right now it looks 
like we could do it within the requested funding.
    Senator Murray. How can we be sure that those machines will 
be effective against anthrax or other toxins? And is there a 
chance it is going to be outdated before we get it installed? 
Is nanotechnology coming?
    Mr. Potter. We were very concerned about a couple of 
things. One was, and very important, was the reliability of the 
system. Because a false-positive, as we have learned over the 
last several years, creates a lot of panic not only within the 
postal community and our workers but also within the 
communities that surround our facilities.
    And so we were very, very diligent in making sure that 
these systems were effective. And our requirement was that we 
have no more than one in every 500,000 tests be a false-
positive. And that was a high hurdle for us to achieve and for 
our suppliers to achieve. And that is why it has taken quite a 
long time for us to do that.
    One of the things that we have done is we have tested in a 
lab environment a thing we call an anthrax simulant. So 
basically it is a non-virulent form of anthrax. And we have 
tested the system such that every time we put this non-virulent 
form of anthrax in, it has a 100 percent hit. We did not want 
to err on the side of lack of false-positives and in the 
process compromise the notion that if something was in the 
system it would be found.
    So we have again spent a lot of time, a lot of diligence 
coming up with a system that right now is state-of-the-art, 
that again we do not know and we cannot forecast what the 
equipment will be 3 and 5 years down the road. But the need for 
us is immediate.
    We have had over 20,000 incidents where buildings have been 
closed, postal facilities have been closed because of anthrax 
hoaxes or just accidental spills. And we believe we need, again 
for the safety of our employees and the people in facilities, 
we do not want to get to the point where we become so callous 
to the fact that these incidents occur that when the real one 
does happen we are not ready to react. So we have to step up 
and move this equipment out.
    And I wish I knew what the best would be 10 years from now 
and I could buy it today but that is simply not the case. We 
have to move on the best we know. And we have used a whole army 
of folks in every agency that we could think of that could help 
us to determine what the best technology is today and to move 
out on it.
    Again, safety of our employees and safety of the 
communities is paramount. I wish we could wait but I do not 
think we have the time to.
    Senator Murray. Fair enough.

                       POST OFFICE CONSOLIDATION

    Mr. Potter, an issue that has always been a concern to this 
subcommittee is the consolidation or closure of small or rural 
post offices. In fact, every year we carry bill and report 
language prohibiting any of the funds provided from being used 
in the consolidation of or closing of rural and other small 
post offices.
    In addition, Title 39 of the U.S. Code stipulates that ``no 
small post office shall be closed solely for operating a 
deficit, . . .''. It is not altogether clear that consolidation 
or closures undertaken by the Postal Service are consistent 
with the law.
    Is the Postal Service planning to consolidate any 
operations or close any post offices this year?
    Mr. Potter. The post office does suspend post office 
operations and has done so for years and will continue to do 
so. We have, just to describe it to you, we have over 2,500 
post offices that serve less than 200 people. We have over 
4,500 post offices that serve less than 200 deliveries. Now I 
am not here to tell you that any one of those post offices 
should or can be closed.
    But I also will tell you that we do have post offices that 
are in people's living rooms. We have post offices that are in 
stores. And as these smaller communities, and I just described 
a profile of some of them, as these communities in some cases 
wither and die, we cannot get people to volunteer their living 
rooms to be post offices when somebody retires.
    Or if we are the last storefront in town and a flood wipes 
it out, we are not about to rebuild the post office.
    And we have had emergency closures and we have followed the 
procedures as laid out by the Postal Rate Commission. We 
followed those procedures for closures. But we have no 
wholesale plan.
    I think there is some assumption that someone in the Postal 
Service has a plan to close 20,000 facilities. There is no such 
plan.
    However, we do have these small units that by act of God or 
somebody retiring, you know, we have to make decisions about 
how we best serve those communities and we do. In many cases, 
what we do is we provide delivery to the door or delivery to 
the end of a person's property versus them having to travel 
down to the post office.
    So we are committed to universal service. We will provide 
service to every American wherever they are and we have no game 
plan to close post offices en masse. There is nobody sitting 
with a secret list of 20,000 post offices to close, although 
people would have you believe that. But every time that there 
is an act of God or retirement we do consider okay, how do we 
best serve the community?

                         VERTICAL IMPROVED MAIL

    Senator Murray. In downtown Spokane, in my State, recently 
six of the satellite post offices were closed. Those six post 
offices served as kind of a collection point of mail for the 
majority of businesses that are in downtown Spokane. They have 
now been replaced with unstaffed mailrooms and locked 
mailboxes. And as a result there has been a lot of disruption 
of service to the buildings. My office has received a lot of 
phone calls and letters regarding that.
    Can you tell me if that type of consolidation is occurring 
in other parts of the country?
    Mr. Potter. We call it a VIM room.
    Senator Murray. You call it what?
    Mr. Potter. VIM, which stands for ``Vertical Improved 
Mail''. Years ago the Postal Service decided that as large 
buildings were constructed, we provide centralized delivery. 
And in many cases, the building owner provided us a room in 
which our employees could come and work and sort mail so that 
the people in the building could pick it up from the equivalent 
of a post office box. And they could pick up their packages by 
knocking on the door.
    What has happened over the course of time is the volume of 
mail for those vertical buildings, those big tall buildings, 
has gone away. Business-to-business delivery or business-to-
business white communication letter and flat communication has 
dropped dramatically. Because the first group to move to 
electronic communication were businesses who were equipped to 
do that.
    And so what we have done is we have undertaken an 
evaluation of those delivery units that are only located in 
large buildings. They are not post offices. They were built to 
provide delivery. If our person can go in there and sort the 
mail for the building in 2 hours, it makes no sense to leave 
the person there for 8 hours.
    And so we have gone throughout the country, and again the 
action is a result of a reduction in mail. In some of those 
cases what we have done is we have had two and three people 
working in those units and we have reduced the number of 
people. They may still get 8 hour coverage. But 40 percent of 
those units throughout the country have eliminated full-time 
staffing in those units.
    Again, it is a result of demand. If the customer is not 
using the mail, we are not going to leave that open.
    Senator Murray. I think one of the problems and the reason 
people were so upset is that the Spokane business community was 
not officially informed or told that any of this consolidation 
was happening. A lot of them learned about the service 
reduction from signs that the post office posted after the 
service reductions were made. And in some cases, the 
information on the signs was inaccurate and postal customers 
were really left in the lurch, which is why we are hearing from 
them.
    I would just encourage you to, if you have to do these 
kinds of things, really work with the business community 
especially in those areas to make sure they understand and are 
working with you.
    Mr. Potter. You have my assurance, we will look at the 
whole communications effort. Because I think if people 
understood the background that I just described to you, they 
would know that we are making a good business decision. And our 
intent is not to reduce the level of service to those buildings 
but to maintain it, if not improve it.
    Senator Murray. Thank you. I really appreciate that.
    Thank you, Mr. Chairman.
    Senator Shelby. Senator Stevens, thank you for joining us.

                    STATEMENT OF SENATOR TED STEVENS

    Senator Stevens. Thanks very much, Mr. Chairman.
    We have several subcommittees meeting this morning at 9:30 
and 10 o'clock. So I am sorry I was not here at the beginning 
of it. Would you place my opening statement in the record?
    Senator Shelby. Without objection, it will be made part of 
the record.
    [The statement follows:]
               Prepared Statement of Senator Ted Stevens
    Thank you Chairman Shelby for holding this hearing.
    I commend Postmaster General Jack Potter for his efforts which have 
guided the Postal Service since June 1, 2001. Under his leadership, the 
Postal Service has increased productivity and has improved customer 
satisfaction.
    In the early 1970's, I along with other senators, joined together 
to create the Postal Service out of the Old Post Office Department. In 
1971, President Nixon signed into law the Postal Reorganization Act. 
Since the Postal Reorganization Act was originally adopted, 
technological advances coupled with the financial state of the Postal 
Service have demonstrated the need for postal modernization.
    Reducing the Post Office's debt is a priority. I am committed to 
working with Senator Collins, Senator Carper, and other members of the 
Government Affairs committee to draft postal reform legislation to 
ensure the vitality of the Postal Service.
    For my State of Alaska, the Postal Service and the concept of 
universal service are essential. Alaska does not have access to the 
infrastructure found in the lower 48. For many Alaskans the mail 
service is a lifeline. Each day the Postal Service delivers 2 million 
pieces of mail to Alaskan homes and businesses, including vital 
products that would not otherwise be available in bush Alaska.
    The services provided by the United States Postal Service reach 
every home and business in America and are essential to American 
commerce and society.
    I know the Postal Service is requesting funds for emergency 
preparedness and I believe it is important to ensure the Postal Service 
has adequate funds to safeguard this country from a hazardous substance 
attack. The Postal Service is a possible conduit for terrorist 
activity, therefore it is necessary for the Postal Service to have 
detection systems to not only protect postal employees, but to 
intercept mail carrying hazardous substances.
    I believe we should do what we can to help the Postal Service 
ensure this Nation's safety.

    Senator Stevens. I do commend the Postmaster General for 
his handling of systems right now, particularly during this 
period of terrorism. And I want the subcommittee to know that I 
have personally visited with him concerning the emergency 
preparedness funding that is so essential. And after that, 
personally visited with the director of OMB.
    We are still trying to work out how we can handle this 
because the budget, as you know, has not handled it in the 
budget session. We will have to work with the Governmental 
Affairs Committee and members of our committee to see if we can 
get support for an emergency declaration for the money that 
they need.
    I believe that the Senate, in particular, should push this 
because after all we were the target of both the attacks. The 
terrorists' use of the mails to come to the Senate, I think is 
something the Senate must respond to.
    And I do believe that if we declare that emergency that the 
House will accept it.
    So I cannot tell you we have got an agreement yet, Mr. 
Postmaster General, but we are still working on it.
    I do thank you for the new post office that is going to be 
brought to that little town I live in in Alaska, which is a 
very welcome development from our point of view. And I hope 
that you will be able to come up this summer and dedicate it.
    Maybe the Chairman would come, also.
    Senator Shelby. I would like to do that.
    Senator Stevens. And we will have a little event there. 
There are only 1,900 people living there, Mr. Chairman.
    Senator Shelby. Do you have fish around there, Mr. 
Chairman?
    Senator Stevens. Not right there but we might be able to 
travel to a place where they fish.
    I just pointed out to another subcommittee that when I was 
in Iraq and Afghanistan I pointed out that both of those 
nations would fit within my State with some space leftover. 
Actually, they are only each about the size of Texas.
    I just really came by to give my support to you, my friend, 
and to urge the committee to work with me and with Chairman 
Collins and see if we can find the support that what we have to 
have for this emergency declaration for the money that you 
seek.
    Mr. Potter. Thank you, Senator.
    Senator Stevens. Thank you.
    Senator Shelby. Thank you, Chairman Stevens.
    Do you want to respond to any of that?
    Mr. Potter. I would just like to thank Senator Stevens for 
his comments and to apologize to him. I did not realize how bad 
things were in Girdwood until I got there and found out that we 
had taken your post office box away and made you begin to get 
general delivery.
    So I am sorry that you had to get in line to get your mail, 
but we will rectify that situation and certainly there other 
safety issues there. So I appreciate your bringing them to my 
attention.
    Senator Stevens. I may have failed to pay the rent, I am 
not sure.
    Senator Shelby. Mr. Potter, what would be the time sequence 
on mailing a first class letter from Fairbanks to Anchorage? 
When would it get there?
    Mr. Potter. Overnight.
    Senator Shelby. Thank you.
    Senator Stevens. That is called Alaska delivery.
    Senator Shelby. We like that Alaska delivery.

                        COMPETITION: E-COMMERCE

    Competition. Why should the Postal Service, a $68 billion 
enterprise with a government monopoly, be allowed to compete 
with the private sector in areas other than its original 
mission?
    In other words, after reviewing the dismal financial 
results of virtually all the Postal Services' commercial 
initiatives, would it not make more sense to concentrate your 
focus on the Postal Service's core mission instead of risking 
new ventures? In other words, what steps have been taken by 
management to ensure that financial mistakes will not continue 
to happen?
    Mr. Potter. I think you will be happy to know, Mr. 
Chairman, that I have eliminated practically all of those 
ventures that were beyond our core mission. We still have a 
mailing online electronic presence. We believe that people 
should be able to, through the Internet, access a printer and 
send cards and letters and we believe that is part of our core 
business.
    But for all intents and purposes, everything else has 
either been eliminated or the only thing that we lend to any of 
these ventures is our brand identity. We have pulled back from 
any expenditures that are beyond what we consider to be our 
core business.

                            REVENUE FOREGONE

    Senator Shelby. The Revenue Foregone Reform Act, to which 
Senator Murray alluded, required an annual reimbursement to the 
Postal Service of $29 million to subsidize certain nonprofit 
mail. The total payment the Postal Service is expected to 
receive is $1.2 billion.
    You have received payments for the past 11 years but this 
budget submission does not request funding this year for this 
reimbursement.
    What impact will this have on the Postal Service and its 
customers if this appropriation is not funded in 2005?
    Mr. Potter. One might say what is $29 million to a $68 
billion organization? The real concern for us is that there is 
still some $899 million owed and it is part of the statute that 
required a $29 million-a-year payment.
    Our auditor has told us that if that revenue stream is not 
a real revenue stream, according to GAAP rules, we may have to 
declare that entire revenue stream as being lost to us. And so 
that is the immediate concern that we have, that we would have 
to write off that revenue stream as a bad debt owed to us.

                    CIVIL SERVICE RETIREMENT SYSTEM

    Senator Shelby. Mr. Potter, the Postal Civil Service 
Retirement System Funding Reform Act, that is a mouthful, of 
2003 reduced the Postal Service's funding requirement for Civil 
Service Retirement System pensions after it was discovered that 
the Postal Service was overfunding its--that is unusual--its 
Civil Service Retirement System obligation. The Postal Service 
used the savings from the Act to reduce its debt by $3.8 
billion. After 2004, the savings are to be held in escrow until 
otherwise provided by law.
    How do you plan to expend the escrow savings if allowed to 
use them?
    Mr. Potter. The law required us to pay down debt last year 
with the savings, which we did. In fact, we paid down more debt 
than the savings were. This year it requires us also to take 
the ``savings'' and pay down debt.
    In 2005, the law assumes that we will use those funds for 
operating expenses. And our goal next year is to break even or 
do better than break even.
    In 2006 is when those monies would go into an escrow 
account. Now the escrow account, as we understood it, was 
created because there was concern on the part of some in 
Congress of how we would use those monies.
    And we have provided a plan to the Congress, to the House, 
a very specific plan, a very thick plan, on how those funds 
would be used. It includes, in particular, a concern about how 
we would handle and deal with capital investments because there 
was some concern that we were not going to capitalize future 
equipment requirements that would help make the Postal Service 
more efficient.
    So we have gone into great detail about what our capital 
investment plan is and we have talked about and addressed an 
issue of concern that was employee retiree health benefit 
funding.
    So I have had a hearing at the House since and the 
indications have been that that plan has at least met the needs 
of most of the Congressmen. We have a similar request from the 
Senate and we are to provide that, I believe, by the end of 
this week, a similar plan. We have done some minor 
modifications but it is essentially the same plan.
    So we believe we have addressed the concerns that caused 
folks to create the escrow account.
    We need the escrow account to be eliminated now that people 
understand how we spend the money because there are no--if we 
are in a break even mode in 2005, there are no funds to create 
a $3 billion plus escrow account. And so we would like that to 
be eliminated.
    And the funds in 2006 would be used similar to the way they 
were used in 2005. Basically, they would be used for operating 
expenses and to fund the capital requirements.

                            FACILITY ISSUES

    Senator Shelby. Regarding facilities repair and new 
construction, I would like to get back to this for a minute.
    In the last 3 years, the Postal Service has reduced capital 
expenditures by more than 50 percent by limiting capital 
commitments to levels that could be funded solely from cash 
flow. The infrastructure continues to age, as we all know.
    In addition, many facilities can no longer meet the needs 
of customers as the delivery network continues to expand, while 
other customers lack convenient access to the postal system 
altogether.
    What priority, Mr. Potter, has the Postal Service given to 
address new construction and expansion needs? And during the 
freeze on capital commitments, what has the Postal Service done 
to adequately maintain its existing infrastructure and preserve 
buildings in an economically effective manner? And, how will 
the Postal Service address infrastructure needs that have been 
deferred since the freeze on capital commitments commenced in 
2001?
    Mr. Potter. Life safety is our No. 1 issue and throughout 
this process we have not taken any funds out of life safety. If 
buildings have been destroyed by acts of God, we have spent the 
money to repair those facilities. We have a robust repair and 
alteration budget. We have not eliminated capital funds for 
repair and alteration. We have slowed the building of new 
buildings. We have 38,000 buildings in the Postal Service. We 
only own 8,000 of those buildings.
    Senator Shelby. Say that again?
    Mr. Potter. There are 38,000 buildings in the Postal 
Service that we have. We only own 8,000 facilities.
    So we have continued with leased facilities, a concept that 
has gone on. But the capital side, the building of postal 
facilities was slowed.
    Now the rationales for slowing that down were a couple. One 
was cash flow. But another real important issue was what are 
our facility requirements going forward, particularly in light 
of the fact that we are seeing volumes decline, we are seeing a 
change in mailer behavior?
    Mailers have taken advantage of rates that allow them to 
deposit mail close to delivery. So where in 1990, if you were 
to mail an advertising piece of mail from Washington, DC to 
anywhere in the country it would be the same rate for you to 
mail it from Washington, DC to Spokane, Washington or to 
Chicago.
    Today we have rates that allow you to bring that mail well 
into the system, right down to the processing center. So I can 
bring the mail to the Seattle plant for mail in Washington and 
I pay a lower fee in order to do that.
    Mailers have taken advantage of that in a significant way 
over the last decade. And in the process of doing that, they 
have reduced the infrastructure that we are required to have. 
So we are constantly analyzing that infrastructure.
    Right now I believe we have more space in plants than we 
need.
    In addition to that, delivery units, if you go back 
historically in delivery units----
    Senator Shelby. You have more space in plants now?
    Mr. Potter. That is the 282 processing centers.
    Now in delivery units, we have also stepped back to take a 
look at what our requirements are. Today, about 80 percent of 
the mail for a letter carrier, letter size mail, is walk-
sequenced. It is presented to the carrier off of a machine that 
is in a plant, where a decade ago they would have to sort all 
of those letters into a case to take out on the street. It is 
now presented to them in a tray. So that case does not have to 
be as big as it was before.
    In addition to that, oversized letter mail, flat mail we 
call it, which is a catalog, a magazine or a large manila 
envelope. In the past all of that mail had to be sorted to the 
carrier route. So it would go to the post office, sort it to 
the carrier route in that unit by clerks at cases. Today, the 
bulk of that, over 90 percent of that sorting, has moved from 
that post office to the plant because we have automated 
equipment that sorts this mail at a very high productivity 
level.
    In fact, we have doubled the level of productivity on flat 
mail in the last couple of years because we have automated it.
    So where a post office used to have to have cases to sort 
mail, flat mail, to carriers and they would have to have 
carrier cases to sort mail for the walks along the way, the 
requirements of that unit have shrunk dramatically.
    In addition to that, the number of packages that we have in 
the system has declined. Priority Mail, Express Mail and 
package mail is down. So we are looking at the demands for 
space within that unit and what we are finding out is that we 
have enough space, we just have to change the methods that 
people are using.
    Now, that is not to say that we do not have growth areas 
like a Las Vegas, where we have whole new communities sprouting 
up. And in those cases we are building post offices.
    Senator Shelby. Let me ask you another question. Could you 
save money, for example, in a lot of areas, like smaller 
communities, by following the business practice of UPS and 
Federal Express where they have bought businesses like the 
copying company, where they will pick up parcels.
    And it looks to me like in some of the smaller communities 
you might not need a new postal building. But if you could rent 
from a store there or if you could rent a little space in that 
store--and I know you do in certain instances--it looks like 
that would be economical.
    Mr. Potter. It would, Senator, and we have over 5,000----
    Senator Shelby. That is what I want to hear.
    Mr. Potter [continuing]. Contract post office units 
throughout the country. We also sell stamps at over 40,000 
locations other than post offices. So we sell stamps in grocery 
stores, people can buy postage stamps through ATM's.
    Senator Shelby. You do not necessarily need a huge 
facility, do you?
    Mr. Potter. We do not, to have a retail operation, we do 
not.
    Also, every one of our 60,000 rural routes are post offices 
on wheels. So they are designed to bring services to the 
customer.
    People now can access, through the Internet they can now 
access a system--we call it Click and Ship--to print a priority 
label and pay for postage online.
    So we are trying to bring as many services as we can to the 
doors of all Americans. We do not think that a traditional post 
office is the only way of doing it.
    Now that said, we are still going to need post offices 
throughout the country for post office box operations. Our 
carriers are going to have to be housed, they have to come and 
collect their mail.
    Senator Shelby. But, you could have a facility without 
spending all of the money?
    Mr. Potter. Exactly and we are doing that, sir.
    Senator Shelby. Especially in smaller areas?
    Mr. Potter. Exactly.

                    CIVIL SERVICE RETIREMENT SYSTEM

    Senator Shelby. Let us go back a minute to the Civil 
Service Retirement System correction, you elaborated on that. 
Would you submit this plan to the committee when you get it?
    Mr. Potter. Yes.
    Senator Shelby. We would like that.
    Mr. Potter. We would be happy to do that.

                            CONSUMER ACCESS

    Senator Shelby. Expanded points of service. We were talking 
about this.
    The President's Commission of the U.S. Postal Service 
proposed to revolutionize retail access by bringing a wider 
range of postal services and products to consumers in grocery 
stores, pharmacies, and other convenient locations. What is the 
current status of your efforts--I know I alluded to it a minute 
ago--to expand access to retail Postal Services at venues other 
than post offices? In other words, where people are.
    Mr. Potter. We are actively engaged and talking with a 
number of national retail outlets.
    Senator Shelby. I am not trying to promote Wal-Mart or 
Target.
    Mr. Potter. You are pretty close there.
    Senator Shelby. But look at the traffic that is going 
through these or Home Depot or Lowe's. You go there and you see 
that there are thousands of people going through those stores 
all over America every day.
    Mr. Potter. Right, and we are working closely with several 
of them. There are issues that we are dealing with, with some 
legal requirements but we are actively engaged in that.
    We recently had a deal with Hallmark Crown Stores. Seventy 
percent of all greeting cards end up in the mail, which I 
thought was a much higher number than I expected it to be. So 
we have worked out an arrangement with them where they will 
sell stamps, they will sell Priority Mail. And we are looking 
at all our options to do that. But we want to do it in an 
economical way.

                         FINANCIAL TRANSPARENCY

    Senator Shelby. Mr. Potter, the President's Commission has 
also proposed to try to enhance the transparency of the Postal 
Service's financial reporting. What steps have you done, 
working with the Board of Governors, to enhance annual 
financial reporting? Is the Postal Service committed to report 
financial information in accordance with the SEC reporting 
requirements and disclosure statements?
    Mr. Potter. The Postal Service has begun doing quarterly 
reports, that we believe are comparable to SEC. Obviously we 
are not a private corporation with stockholders but we have 
begun enhanced quarterly reporting. We have posted it on our 
web site. We have begun to report the equivalent of the 8-Q 
where basically if there is a major incident that might affect 
our finances, we are reporting that.
    We have changed our annual statement to become what we 
believe is more transparent.
    In addition to that, we are in contact and having 
discussions with the SEC and they are taking a look at our 
reports and we are looking forward to their recommendations on 
what we can do.
    Right now we believe we are probably more transparent than 
most, in terms of the level of information that we provide 
through the rates process and through all of the oversight that 
we have.
    Senator Shelby. But first of all, you need to know your 
financial condition, the real financial condition. Otherwise, 
you really cannot run the place if you do not know what is 
going on.
    Mr. Potter. One of the outcomes of doing that was the Civil 
Service Retirement legislation change. At the time people were 
saying, there were some saying we were underfunding our 
retirement benefits.
    Senator Shelby. You certainly do not want to do that, 
either.
    Mr. Potter. But we were of the opinion that we might have 
been overfunding. So there was the exploration and thanks to 
GAO and the administration, who took it upon themselves to help 
us with that, we were able to find out, thankfully, that we 
were in an overfunding condition.

                              SPONSORSHIPS

    Senator Shelby. What return on investment has the Postal 
Service realized from sponsorship deals such as those with the 
New York Yankees, Tampa Bay Devil Rays, and Lance Armstrong?
    Mr. Potter. The sponsorships, I do not have a specific 
return.
    Senator Shelby. Would you furnish that for the record?
    Mr. Potter. I can furnish a response. I do not know if we 
have a specific return.
    Senator Shelby. You need some kind of way to measure that.
    Mr. Potter. It is very subjective and we will provide you 
what our analysis is for the record.
    Senator Shelby. But if you were advertising in private 
business, you would measure that advertising to see if you are 
selling cars or you are moving certain goods and services. 
Otherwise, you stop that advertising or you change it.
    Mr. Potter. Exactly. We will provide it for the record. 
Some of the numbers are I believe, for example, some you will 
look at with a skeptical eye and say I do not think it is worth 
that much. I have that same skeptical eye when it comes to a 
few of these.
    Senator Shelby. I am not in a position to say.
    Mr. Potter. I am not either, so we will share with you what 
others' analyses of it are.
    [The information follows:]

    Sponsorships increase brand awareness, build positive corporate 
image, promote employees' corporate pride and accrue positive public 
relations. While some of those attributes may be difficult to measure, 
the Postal Service did commission its advertising agency, Campbell-
Ewald, to track and measure the level of media exposure for the Postal 
Service for the July-August 2003 timeframe, including the 2003 Tour de 
France. The value of domestic exposure for the Postal Service for this 
2-month time frame represented in excess of $31 million.
    Regarding the other sponsorships, the Devil Rays sponsorship should 
be regarded more as an advertising purchase; it solely comprises a 
billboard in the outfield promoting Priority Mail. Most of what we pay 
for in our Yankees sponsorship is also about advertising exposure in 
the stadium. However, in the case of the Yankees relationship we also 
received permission to produce philatelic merchandise that includes 
Yankee images. From the sale of this merchandise we gross several 
million dollars annually.

                            DELIVERY GROWTH

    Senator Shelby. The postal mail volume has continually 
dropped since fiscal year 2000, while the number of new 
addresses has increased by 5.4 million annually. The volume of 
first class mail and the number of delivery points are moving 
in opposite directions it seems.
    How do you plan to address, Mr. Potter, the delivery 
requirements for communities with the rapid growth of homes and 
businesses? And once the determination has been made that a new 
postal facility is needed, what is the approval process? Is it 
too protracted or can you have a fast track?
    You know, you have got communities growing by leaps and 
bounds and you have got some that are shrinking.
    Mr. Potter. We have got advance site acquisition where we 
actually go out and buy land in anticipation of growth.
    Senator Shelby. Save you some money, will it not?
    Mr. Potter. For example, out in Las Vegas we worked with 
the Bureau of Land Management, which has control over expansion 
beyond the city. And there are different actions that are 
taken----
    Senator Shelby. Did they give you the land? They should.
    Mr. Potter. We have been able to do that. I do not want to 
publicize it. We have been able to work certain arrangements, 
but in other parts of the country we cannot do that. But that 
is an example of what we do. We have different strategies in 
different areas around the country.
    But advance site acquisition is one of the methods that we 
use where we anticipate growth.
    Senator Shelby. You do that by demographic trends, among 
other things, do you not?
    Mr. Potter. Exactly, and you just look at, for example, the 
midsection of the country, you look at Montana, South Dakota, 
Iowa, down to Oklahoma. We have seen 30 percent of the 
population has been reduced. And obviously, the growth is in 
other sections.
    We do look to build facilities in those areas of the 
country. And we have provided funds to do that and we are 
expanding the amount of money that we have spent on that.

                           UNIVERSAL SERVICE

    Senator Shelby. As you look at the demographics of rural 
America, rural America is shrinking in population. How do you 
anticipate that to reduce the facilities and your costs? What 
about the political overtones there?
    Mr. Potter. Well, reducing the facilities is a major issue 
and one that by law we cannot do for economic reasons. So we 
live within the law. It is one thing that we would hope that, 
if we were to get reform legislation, would be considered by 
the Congress.
    Senator Shelby. It is universal mail service.
    Mr. Potter. We are not going to back away from universal 
mail service. If we do, I do not think you need a Postal 
Service in this country. That is the reason that we were 
formed. There are communities in America that would not get 
service if it were not for the Postal Service. We recognize 
that and we believe that.
    And I think that based on everything that I have read about 
the creation of the Postal Service, that that is why we were 
formed, to assure that. Some people have suggested that we get 
out of the package business, for example. So I said, how did we 
get into it?
    It turns out in 1912 there was a law passed by Congress, 
prior to which the Postal Service was not able to carry 
anything that weighed more than 4 pounds. But what happened and 
what was happening throughout the country was that there were 
rural communities that were either getting no service or 
whatever service they were getting, was an infrequent service, 
they were paying exorbitant rates to get.
    There were inner-city communities, the less affluent inner-
cities communities that were not getting regular package 
services. And when they were getting it they were paying 
exorbitant fees to receive it.
    So when I look back historically I think wow, think about 
it today. If we were not in certain areas, I am not sure that 
the private sector could step in or would step in and deliver 
without surcharges.
    And today, many of our competitors surcharge rural 
Americans for delivery of mail or companies that want to reach 
rural Americans. And certainly others do not have daily 
delivery to certain communities that are less affluent.
    So I think the role of the Postal Service still is relevant 
today in light of what we were founded to do and the notion 
that everybody has equal access to a system to conduct business 
and send messages.
    Senator Shelby. At one time, you were in the banking 
business, too.
    Mr. Potter. We were and I wish we could get back into it. 
If you look at foreign post, many of them are getting into the 
banking business because they have retail outlets in these 
small communities.
    Senator Shelby. As chairman of the Banking Committee, I am 
not recommending that.
    Mr. Potter. I can always try, right.

                     ADDITIONAL COMMITTEE QUESTIONS

    Senator Shelby. Mr. Potter, we appreciate your appearance. 
We appreciate your candor and we have a number of requests you 
said you would get back with the record to us.
    [The following questions were not asked at the hearing, but 
were submitted to the Service for response subsequent to the 
hearing:]

            Questions Submitted by Senator Richard C. Shelby

                    DETECTING BIOHAZARDS IN THE MAIL

    Question. I am told by GAO and others that the detecting systems 
that the Postal Service has acquired may not have the capability to 
detect other hazardous agents, such as a chemical or radiological 
weapon. Given that there are many other toxic agents that can be sent 
through the mail without being detected by your system, is the Postal 
Service still planning to deploy such detecting systems?
    Answer. Yes. We currently plan to install 1,708 Biohazard Detection 
Systems (BDS) at 282 facilities nationwide. National deployment of the 
BDS began in early April 2004. The 282 sites were selected because they 
represent our major processing facilities and cover our collection mail 
entry points for the entire postal network. Today, we have a total of 
32 BDS systems in operation.
    Nationwide installation of the BDS will resume on June 5. The 
program experienced a slight delay for testing to determine why some 
systems were producing ``inconclusive'' test results. Inconclusive or 
non-determinant results do not mean that a threat was in the mail. It 
simply means that tests had to be rerun to get a valid result.
    Our goal through the testing, implementation and everyday use of 
the BDS has been to ensure the safety of every employee and the 
customers we serve. That is why it was critical that the system 
operated properly before installation continued. Postal Service 
Engineering, working along with the equipment contractors, conducted 
tests to determine the cause of the problem. The cause has been 
determined and changes to basic processes and procedures have been 
instituted to return BDS to normal performance levels.
    Our methodology has been to develop a threat assessment that 
outlines known threats to our resources. Based on that assessment, we 
have identified and developed technologies to mitigate those known 
threats. These technologies include the BDS, capable of detecting 
biohazards, the Ventilation and Filtration System, capable of 
containing biohazards, and an irradiation process that neutralizes 
biohazards.
    BDS was developed as a scaleable system. In its current state, the 
system can detect only for the presence of Anthrax. However, BDS can be 
expanded in the future to detect for other biological agents, as well 
as toxins such as Ricin. Working in conjunction with our primary 
contractor for the BDS program, Northrup Grumman, we are integrating a 
prototype device in the BDS equipment that is capable of detecting 
Ricin. Testing of the device is planned for the spring of 2004.
    Question. How many systems have been installed? Where have they 
been installed and at what cost?
    Answer. We currently have 31 production systems and 1 pre-
production system operating. The pre-production system will be replaced 
with a production unit as part of the national deployment effort.

------------------------------------------------------------------------
           Unit Location               Number of Units    Costs (Approx)
------------------------------------------------------------------------
Cleveland, OH.....................  9 Production Units..      $2,250,000
Baltimore, MD.....................  11 Production Units.       2,750,000
Pittsburgh, PA....................  1 Pre-Production             250,000
                                     Unit.
Lancaster, PA.....................  5 Production Units..       1,250,000
Queens, NY........................  6 Production Units..       1,500,000
------------------------------------------------------------------------

    We estimate the manufacturing and installation costs for one BDS 
system to be approximately $250,000 to $180,000 for the hardware and 
$70,000 for logistical support and installation efforts. To date, we 
have awarded a contract for the first production phase that consists of 
the manufacture and installation of 742 BDS systems. Total funding 
committed to date is $212.1 million.
    Question. Will additional detection capabilities be added in the 
future? If so, how cost effective is it to address one threat at a 
time?
    Answer. We have developed a threat assessment that outlines known 
threats to our resources. Based on this assessment, we have identified 
and developed the Biohazard Detection System (BDS) capable of detecting 
biohazards. BDS was developed as a scaleable system. In its current 
state the system can detect only for the presence of Anthrax. However, 
BDS can be expanded in the future to detect for other biological 
agents, as well as toxins such as Ricin. Working in conjunction with 
the primary contractor (Northrop Grumman) for the BDS, we are 
integrating a prototype device within the BDS equipment that is capable 
of detecting Ricin. Testing of the device is planned for the spring of 
2004.
    As threats are identified and required to be detected by BDS, we 
will aggressively pursue adding the capabilities to our detection 
systems. However, in order to add additional threats to BDS, specific 
reagent sets and processes must be developed and scientifically 
validated with respect to each individual threat.
    Question. Are there any analyses of how the Postal Service's 
efforts compare to the steps that private sector mail companies have 
taken to detect hazardous agents?
    Answer. Yes. After the anthrax attacks of October 2001, the Postal 
Service consulted with the Joint Program Office (JPO) for Biological 
Defense as well as other military and Federal agencies. After these 
consultations, it was determined that a system did not exist that met 
the needs of the Postal Service. From October 2001 to September 2002 
more than 20 systems were tested. BDS was the only system that 
successfully passed all test protocols jointly established by the 
Postal Service and Bio-Defense experts.

                            COST REDUCTIONS

    Question. Please outline the cost-cutting measures planned for the 
Postal Service for fiscal year 2005.
    Answer. We are in the process of finalizing cost reduction plans 
for fiscal year 2005, which will become a part of the fiscal year 2005 
Integrated Financial Plan, scheduled for Board of Governors review in 
September. It is our expectation that we will plan for a sixth straight 
year of positive productivity gains as a result of continuing cost 
reduction efforts that has been successful in the past 5 years.
    We have achieved savings through a variety of measures, which we 
will build upon for fiscal year 2005. Postal management will continue 
to identify best practices and achieve savings through breakthrough 
productivity initiatives. We will continue to deploy automation that 
will save mail processing costs, and that also will have a positive 
effect on delivery productivity through higher levels of sequenced mail 
for the letter carrier. We will also continue to achieve additional 
savings and cost avoidances through streamlined transportation 
networks, refreshed communications/computer networks, centralized 
support functions and opportunities presented by supply chain 
management initiatives.
    Through stringent cost management, we have delivered $5 billion in 
cost savings since 2000. This includes $2.7 billon in savings resulting 
from Transformation Plan initiatives over the last 2 years. We are on 
track to surpass the $5 billion in savings called for by the Plan over 
the 5-year period ending in 2006.
    Question. What actions does the Postal Service intend to implement 
to continue the process of streamlining its operations?
    Answer. In its July 31, 2003 report, the President's Commission on 
the United States Postal Service made a total of 35 recommendations 
derived from the findings of its four subcommittees that reviewed all 
aspects of Postal Service operations. Of those 35 recommendations, 17, 
or approximately 50 percent, aligned closely with the strategies that 
the Postal Service adopted as ``near-term'' strategies in its April 
2002 Transformation Plan. The ``near-term'' strategies are those the 
Postal Service can accomplish without statutory change. For example, 
the President's Commission recommended that the Postal Service expand 
retail access to postal products and services. This was a key 
Transformation Plan strategy that is being implemented currently 
through such programs as retail access to postal services through 
partnerships with commercial retail stores, such as Safeway, and 
continuing expansion of product and service offerings over the 
Internet.
    For a complete review of the progress of Transformation Plan 
strategies please see the attached November 2003 Transformation Plan 
Progress Report. Please note that the Transformation Plan made two key 
commitments: to hold rates steady and to remove $5 billion in costs by 
the end of 2006. The Postal Service is well on its way to meeting these 
commitments. Rates will be held steady until 2006, and $2.7 billion of 
the $5 billion commitment was achieved by the end of fiscal year 2003.
    Of the 18 remaining President's Commission recommendations, most 
deal with issues that require statutory change, such as changes in the 
governing structure of the Postal Service. In the Transformation Plan 
the Postal Service associated such topics with structural change, and 
while it made some recommendations, it recognized that many of the 
policy issues are within the purview of the Congress, not the Postal 
Service. There were a small number of President's Commission 
recommendations that the Postal Service did not address in its 
Transformation Plan in any form, such as personalized postage stamps 
and an independent advisory body for the evaluation, acquisition and 
deployment of technology. The Postal Service has been studying the 
feasibility of such recommendations. Early in 2004 the Citizens' Stamp 
Advisory Committee, which reviews and approves subjects for printed 
postage stamps, recommended against implementation of personalized 
postage stamps by a vote of eight to three. The Committee cited nine 
reasons, including concerns about counterfeiting and negation of the 
social value of stamps as a unifying symbol of culture and community.

                         E-COMMERCE INITIATIVES

    Question. The 2003 Comprehensive Statement on Postal Operations 
states that the Postal Service is evaluating and modifying non-postal 
business plans. It is my understanding that e-commerce was an area of 
special concern. As a result of the e-commerce evaluation, what changes 
has the Postal Service made regarding commercial ventures, including e-
commerce activities?
    Answer. We have aggressively reevaluated e-commerce initiatives and 
we have eliminated those that didn't meet expectations. We are focusing 
on repositioned core-product initiatives to satisfy customer needs. Our 
Postal Service website, www.usps.com, is a logical extension of our 
core mission. Our customers may access this site to buy stamps, look up 
ZIP Codes, and even ship parcels through our new Click-N-Ship service, 
a convenient online shipping solution that allows customers to send 
mail without leaving their home or office.
    And we are moving toward greater reliance on private sector 
providers to eliminate postal expenses. For example, we repositioned 
Electronic Postmark and Mailing OnLine to private sector agreements.
    We will continue to support initiatives that align with our core 
mission. As we gain experience, we will assess performance and make 
determinations on a product-by-product basis.
    Question. How do initiatives, such as the partnership with Hallmark 
Gold Crown, differ from prior e-commerce ventures?
    Answer. Our latest initiative is building upon previous initiatives 
designed to expand customer access without creating additional, 
permanent network costs.
    Recently, we have identified potential partnerships with 
sophisticated multi-location retailers, such as Hallmark, through 
standardized contract terms and conditions that are individually 
awarded. These limited-service contract postal at units will provide 
only the most desired postal products and services and times and in 
locations that are convenient to consumers. This relationship between 
two partners with an interest in ``keeping customers in the mail'' was 
not intended to replace post offices that offer a full line of 
services.
    These multi-location retailers are easily recognized and well 
respected brands that complement the USPS brand. These providers also 
have the marketing expertise and advertising funds to support the 
promotion of these units. These partners will provide retail services 
below the cost of the traditional post office.
    Hallmark was the first limited service CPU provider and the first 
to use Postal Service-provided postage evidencing devices to affix 
postage. By using this device, we reduce administrative costs in the 
field by eliminating stamp orders (stamps are provided under the 
consignment program) and eliminating daily financial reporting as well 
as auditing and bonding requirements. Because Hallmark stores pre-pay 
for the postage loaded onto the provided meters, the consumer benefits 
from conducting their store purchase with their postal purchase in one 
transaction and they can use their credit cards (credit card postal 
purchases are not allowed in traditional contract postal units.)
    By providing expanded access to Postal Service customers, contract 
postal units (CPUs) provide the Postal Service with a flexible and 
adjustable retail network that is a lower-cost alternative to Postal 
owned facilities.
    As customer behavior changes and they begin to access postal 
services through the Internet or through other means, and as they move 
to new communities, we will have the ability to adjust our retail 
network to meet the demand. CPU partners typically offer customers the 
convenience of providing postal services in the evenings and on 
weekends where customers live, work and shop.
    Customers can also purchase stamps ``at post office prices'' at 
participating Stamps-on-Consignment locations such as grocery stores, 
convenience stores, drug stores, banks and ATMs. Approximately 40,000 
locations and ATMs are part of this network. These stamp channels also 
provide expanded hours and days of access. These stamps are provided to 
our consignees through our vendor. The Postal Service cost to sell 
stamps through consignment is one of our least expensive methods of 
selling postage.

                            REVENUE FORECAST

    Question. Is it possible to offset the revenue loss without 
additional rate increases?
    Answer. We continuously assess our products and services to 
identify ways to stabilize costs to offset any revenue losses 
independent of our rate increases. As mentioned earlier, we are on 
track to take $5 billion in cost out of the system by 2006. 
Concurrently, we are working to enhance our products to keep pace with 
customer needs and grow revenue.
    Question. What is the Postal Service doing to reverse the revenue 
losses it has experienced with Express Mail since 2000 and Priority 
Mail since 2001?
    Answer. In terms of Express Mail and Priority Mail, customers have 
told us that the four most important factors in choosing a shipping 
company are service/reliability, price, ease of use/access, and 
information.
    In late 2001, we entered into a transportation agreement with FedEx 
to fly a significant portion of our Express Mail and Priority Mail. As 
a result, costs were reduced and service levels are at an all time 
high. We are also regularly reviewing our Express Mail network for 
opportunities to expand our overnight reach.
    Some of the cost-reduction initiatives we are working on include 
processing and barcode standardization to increase automation of the 
parcel mail-stream. We recently awarded a contract for 75 Automated 
Package Processing Systems (APPS) that will provide high-speed parcel 
and bundle processing, reduce labor costs, and provide en route 
tracking information for customers.
    Another initiative to help generate revenue was our recent launch 
of a pre-paid Priority Mail Flat Rate envelope to make it easier for 
customers to use Priority Mail service. We are also evaluating a Flat 
Rate Priority Mail box. These products will make it easier for 
customers to mail documents and merchandise anywhere in the country for 
one flat rate without the need for weighing and rating to determine how 
much postage needs to be placed on their package. We also enhanced our 
parcel pickup capabilities by allowing customers to notify their local 
post office when they have prepaid Priority Mail and Express Mail 
packages to be shipped. The notification alerts their carrier to pickup 
the packages at the same time they deliver their mail. Since we are 
already at the address, there is no charge for the pickup.

                       PUBLIC-PRIVATE PARTNERSHIP

    Question. The President's Commission stated that the Postal Service 
should continue to look for opportunities to offer discounts for 
additional work-shared products and to expand opportunities for small 
mailers to participate in them, particularly as new technologies are 
developed, that reflect the lowest combined public-private sector 
costs.
    Does the current rate-setting environment prevent the 
implementation and acceptance of work-sharing discounts with large 
mailers and cost the USPS potential sources of revenue?
    Does the Postal Service believe the work-share discounts are 
appropriate?
    What opportunities does the Postal Service foresee regarding 
additional work-sharing and what impact will it have on the budget?
    Answer. The current rate setting environment has not prevented the 
implementation or acceptance of generic worksharing discounts. Generic 
discounts are available to all postal customers and are used by 
thousands of customers; they are applied in a standard manner for use 
at thousands of postal facilities. We note that these thousands of 
customers are not only large mailers, but also small, local businesses 
and nonprofit organizations.
    Many customers or groups of customers have different mail 
preparation capabilities. At the same time, the operations of different 
postal facilities can be enhanced by variations in mail preparations 
designed to accommodate unique mailing needs. This creates potential 
opportunities to design worksharing arrangements for small groups of 
customers (niche classifications) or individual customers (negotiated 
service agreements or NSAs.) The current rate setting process often 
involves protracted and expensive litigation for these relatively 
simple cases. For instance, a current small filing for Periodicals, 
which affects primarily one mail preparer and roughly a tenth of 1 
percent of total mail volume, is 3 months into what is an 
``accelerated'' schedule. Realistically, this process cannot be 
repeated for thousands of customers or customer niches.
    The Postal Service is a strong supporter of workshare discounts. In 
testimony before the President's Commission on the U.S. Postal Service, 
Chief Marketing Officer Anita Bizzotto stated:

    ``Partnering with customers through worksharing has been one of the 
major success stories of the U.S. Postal Service over the past 30 
years. These partnerships, now valued at $15 billion a year, have 
provided affordable mailing alternatives for customers; reduced Postal 
Service costs; and; have been a primary source of mail volume growth. 
These partnerships and worksharing discounts have helped usher in the 
age of automation by encouraging customers to prepare machine-readable 
mail and have remained an important tool for aligning the mail with the 
operating environment.''

    Some opportunities for additional worksharing will come in the form 
of more customized arrangements. At the same time, there is still 
opportunity for new generic arrangements. For instance, we believe more 
incentives are needed to encourage the transporting of magazines and 
newspapers downstream closer to their points of delivery. Such 
destination entry incentives have been successful in holding down rate 
increases for parcel and advertising mail customers but current policy 
has limited the applicability of these incentives. We have not 
succeeded in extending worksharing opportunities to Priority Mail but 
we are looking for opportunities that would serve the needs of Priority 
Mail customers.
    Lastly, we are concerned that the language in some of the 
legislative proposals may have a harmful effect on workshare in the 
future. In general, the more rigid standards which are applicable only 
to worksharing rates run counter to attaining one of the enunciated 
goals of postal reform: a more flexible rate structure. Rigid standards 
for worksharing rates would limit the Postal Service's ability to 
implement and maintain workable worksharing rates in a dynamic 
operating environment.

                         RETAIL STORES REVENUE

    Question. Has the Retail Network Optimization Plan been 
implemented?
    Answer. Since the initial development of the Transformation Plan, 
the Postal Service has established a retail direction that is focused 
on access, convenience, and ease of use for the customer. Building upon 
these goals, we have implemented a program that allows customers to 
purchase postage on-line, enabling letter carriers to pick up their 
postage materials when the carrier is delivering to the area. This is 
accomplished via the USPS Web site and eliminates the need for a 
special trip to the Post Office, which is a real convenience to small 
businesses and consumers who cannot always make a visit to the post 
office during normal businesses hours.
    Our retail network of access is evolving on a continuing basis and 
does not easily fit into an absolute optimization plan. For example, 
since the development of the Transformation Plan was announced, we have 
implemented a much more robust Web access channel. We do know that in 
order to serve the customer we must be where they work, shop, and live. 
Our focus is to provide that access and to adjust the network to meet 
those needs.
    In the Transformation Plan we talked about technology and the role 
it plays for retail. We have begun the roll-out of 2500 Automated 
Postal Centers (APCs), that enables our customers to perform 80 percent 
of the most common transactions that take place at our counters. They 
are located in our busiest offices and provide access to our products 
and services up to 24 hours a day, 7 days a week. Implementation will 
be completed by December of this year.
    The retail network continues to evolve, and like most businesses it 
is more than ``brick and mortar''--all of the access points are 
critical in order to provide universal service. The Postal Service will 
continue to review, monitor, and adjust this network (expansion and 
consolidation) to ensure that it is operating as efficiently as 
possible and providing needed services to our communities.
    Question. How were threshold values (proximity to other postal 
facilities, retail productivity indicators, number of households, 
deliveries, walk-in revenue, and small business accounts) determined?
    Answer. We do not have established thresholds for the Postal 
Service. We have a database that contains this type of information that 
we provide to the field to help them determine how to adjust their 
retail operations to meet the needs of customers.

                    EMERGENCY PREPAREDNESS EXPENSES

    Question. Since 2002, Congress has provided emergency 
appropriations to support the Postal Service's anthrax emergency 
preparedness activities. After the attacks, Congress appropriated $762 
million to decontaminate postal buildings and to buy and install 
biohazard detection equipment. The Postal Service reportedly has spent 
a total of $971 million on emergency preparation, which include $209 
million from its revenue.
    Please provide an overview of what this funding has been spent on 
to date.
    Answer. Following this paragraph, please find excerpts from the 
Postal Service's fiscal year 2005 Budget Congressional Submission, 
which addresses emergency preparedness costs to date, as well as our 
appropriations request. The following is information quoted directly 
from this document.
U.S. Postal Service Fiscal Year 2005 Budget Congressional Submission, 
        page 12:

    ``Pursuant to Public Law No. 107-117, the Postal Service submitted 
on March 6, 2002, an Emergency Preparedness Plan that outlined and 
discussed in detail the activities considered necessary to provide for 
the safety of our employees and customers. The Plan covered a span of 
several years and the activities are categorized as Near-Term, 
Intermediate-Term and Long-Term in describing the time frames during 
which these activities are planned. At the request of the 
Appropriations Committee, an update to the Plan was submitted April 30, 
2003.
    ``In the Plan, obligations for the Near-Term activities identified 
for fiscal year 2002 were projected to total $587 million. Of this 
total, $500 million was funded by Public Law 107-117, and $87,000,000 
was funded by Public Law 107-206.
    ``No funding for emergency preparedness was included in the initial 
Postal Service Fiscal Year 2003 Budget Request pending completion of 
the Emergency Preparedness Plan, however, a fiscal year 2003 budget 
amendment request was subsequently forwarded to the Office of 
Management and Budget to fund activities totaling $799.8 million 
relating to fiscal year 2003.
    ``The Postal Service 2004 Budget requested $350 million to continue 
emergency preparedness activities.
    ``No additional funding beyond the $587 million, received in 2002, 
has been received.
    ``The Plan and related requests are dynamic and, as such, some 
modifications are necessary as our field-testing proceeds, our 
knowledge of biohazard detection increases, and as technology 
matures.''
U.S. Postal Service Fiscal Year 2005 Budget Congressional Submission, 
        page 13:
    ``Significantly more funds than originally anticipated were 
required to clean and restore two mail processing centers that had been 
closed due to anthrax contamination. Safety was the paramount concern 
in performing this task and actions were coordinated with several 
scientific, medical, and government agencies. Delays were experienced 
due to questions regarding indemnification of contractors performing 
the process and the sheer scale of the task for which EPA required 
additional testing and verification. Reimbursement is now requested for 
the additional costs required in the refurbishment of these facilities.
    ``A major portion of the $779 million Emergency Response funds 
requested for fiscal year 2005 and prior years will be used to continue 
acquisition and deployment of ventilation and filtration (VFS) 
equipment that was initiated with the funds provided previously. A 
portion of the $587 million provided during fiscal year 2002 is being 
used to develop, acquire and install VFS on our culling and canceling 
equipment. Our Emergency Preparedness Plan discussed further deployment 
of VFS equipment to be installed on our delivery barcode sorters (DBCS) 
and automated flat sorting machines (AFSM) 100 and loose mail systems. 
The $779 million includes funding for the DBCS and AFSM 100 VFS 
acquisition and deployment.''

                                            [In thousands of dollars]
----------------------------------------------------------------------------------------------------------------
                                                                                    Fiscal Year
                              Item                                  Prior Years        2005            Total
----------------------------------------------------------------------------------------------------------------
Building Restoration............................................         268,800  ..............         268,800
Biohazard Detection System......................................         402,700          24,000         426,700
Ventilation and Filtration......................................         271,700         364,000         635,700
DC Area Mail Irradiation Facility...............................           9,000           7,000          16,000
Other...........................................................          18,800  ..............          18,800
                                                                 -----------------------------------------------
      Subtotal..................................................         971,000         395,000       1,366,000
Appropriation Received..........................................        -587,000  ..............        -587,000
                                                                 -----------------------------------------------
      Total.....................................................         384,000         395,000         779,000
----------------------------------------------------------------------------------------------------------------

                                 ______
                                 
              Questions Submitted by Senator Patty Murray

  CONSOLIDATION OF RURAL POST OFFICES AND CLOSURE OF SMALL POST OFFICE

    Question. There have been instances when the Postal Service does 
not consult with or officially inform the customers and community prior 
to closures or consolidation. Why not? What is the process employed by 
the Postal Service when it closes a facility or consolidates 
facilities?
    Answer. The Postal Service follows post office closing and 
community notification procedures outlined in Title 39. There are 
occasions, however, due to emergency situations such as loss of lease 
with no suitable alternate quarters, a natural disaster or flood where 
there are no suitable alternate quarters or other similar emergencies. 
The Postal Service considers a suspension a temporary situation until a 
decision is made to either re-open the facility or propose 
discontinuance. If discontinuance is proposed, then a community meeting 
along with customer questionnaires are sent out to gather input from 
the community.
    Attached are the Postal Service regulations governing the 
discontinuance and emergency suspension of postal facilities.

                      POSTAL FACILITY CONSTRUCTION

    Question. The fiscal year 2004 Omnibus Appropriations bill directed 
the Postal Service to report on localities that require a new postal 
facility, the current conditions of post offices in need of renovation, 
and when a new facility or replacement will be built. The report is 
required within 90 days of the enactment or by my count, April 22, 
2004. Can you give me a preview of what the report will say? What is 
the status of postal facilities in Washington State and is there a need 
for any new construction or renovation in my State?
    Answer. In fiscal years 2001 and 2002 and part of 2003 due to 
financial constraints, the Postal Service implemented a freeze on 
capital and expense investments related to facilities. Exceptions to 
the freeze were allowed for ongoing construction and, on a case-by-case 
basis, projects were submitted to Headquarters for review and approval 
to address health and safety, emergency, legal, and lease pre-emption 
issues. Exceptions were also allowed for repair and alteration of 
facilities due to legal, health and safety, emergency, and maintenance 
of our infrastructure.
    During fiscal year 2003, the freeze was lifted. Annual budgets were 
established for repairs and alterations. Repair and alterations 
continue to be limited to projects addressing legal, health and safety, 
emergency, and infrastructure maintenance issues, within the budget 
provided. At the same time, a new national prioritization system was 
established for new or replacement customer service projects. This 
process focused on space deficiency and growth, and continued to allow 
exceptions to be submitted as part of the prioritization process and 
throughout the year for health and safety, emergency, legal, and lease 
preemptions issues, as well as those projects which generated favorable 
returns on investment. The projects included on the list depend on the 
funds available in the budget and the priority scores of the projects 
submitted. These do not include numerous other projects which are 
approved on an ongoing basis as exceptions.
    As a result of the actions above, we believe we are addressing our 
most critical facility needs and prioritizing projects within the 
funding available.
    Regarding Washington State facilities, the following is a list of 
projects being pursued as part of approved plans:
New Facility Projects
  --Bickleton Main Post Office
  --Clarkston Main Post Office
  --Ford Main Post Office
  --Lake Stevens Carrier Annex
  --Lilliwaup Main Post Office
  --Seattle--Wedgewood Carrier Annex
  --Southworth Main Post Office
  --Spokane Vehicle Maintenance Facility
  --Union Main Post Office
Repair and Alteration Projects
  --Auburn Main Post Office--lobby remodel
  --Colfax Main Post Office--life safety systems upgrade
  --Newport Main Post Office--heating/air conditioning replacement
  --Pasco--Processing & Distribution Facility--heating/air conditioning 
        controls
  --Pullman Main Post Office--security upgrade
  --Spokane--Hillyard Station--enlarge collection box drop-off lane
  --Spokane Processing & Distribution Center--install concrete pad 
        enclose dock
  --Tacoma Processing & Distribution Center--security upgrade
  --Vancouver--Downtown Station--window replacement
  --Veradale Main Post Office--enclose dock

                 POSTAL REFORM/REGULATORY BOARD ISSUES

    Question. Legislation enacted last year shifted the responsibility 
of funding civil service retirement benefits earned by postal employees 
while they served in the military from the Treasury Department to the 
Postal Service. I understand that most of the financial obligation is 
due to military service performed before the modern-day Postal Service 
was even created in 1970. The President's Commission recommends that 
military service costs not be borne by the Postal Service. What would 
be the financial impact on the Postal Service if the Postal Service is 
to be responsible for this $27 billion cost?
    Answer. The Postal Service has submitted two proposals concerning 
the disposition of these funds. Our first proposal requests that the 
United States Treasury again be required to fund all CSRS costs 
associated with the military service of Postal Service employees and 
retirees. Our second proposal assumes that responsibility for funding 
military service costs is transferred to the Postal Service.
    Under the first proposal, in fiscal year 2006, the Postal Service 
will contribute $5 billion to fund and pre-fund retiree health benefits 
for all career employees; under the second proposal it will contribute 
$1.9 billion to fund retiree health benefits and to pre-fund retiree 
health benefits for career employees hired after fiscal year 2002. The 
difference in the amounts reflects the fact that returning the funding 
of CSRS costs of military service to the Treasury increases the 
``savings'' under the Act, and makes available additional funds that 
can be used to pre-fund retiree health benefits for career employees.
    Both proposals address the funding retiree health benefits, which 
we estimate to be valued at between $40 billion and $50 billion, 
depending on the long-term medical inflation assumption used, at the 
end of fiscal year 2002. At the end of fiscal year 2003, post-
retirement health benefit obligations were estimated to be valued 
between $47 billion and $57 billion.
    Each proposal stands on its own merits. Neither was designed around 
its impact on rates. The first proposal returns to the U.S. Treasury 
the responsibility for funding CSRS pension costs earned by military 
service of Postal Service employees and uses funds made available from 
this adjustment to pre-fund retiree health benefits cost for current 
Postal Service employees. However, to provide the required level of 
funding, an additional $1.2 billion in funds would be necessary, 
causing a 2 percent increase in rates.
    In our second proposal, it is assumed that the transfer of CSRS 
military service costs to the Postal Service is not reversed and that 
retiree health benefits are pre-funded only for new employees hired 
after fiscal year 2002, when the pension funding reform legislation was 
enacted. This would require approximately $200 million more in 
additional funds, causing a 0.3 percent increase in rates. It would be 
possible to select arbitrarily a different hire date for funding 
employee retiree health benefits for new employees to match the 
additional funding requirement of $1.2 billion, but it would be just 
that, arbitrary.
    Question. I also want to let you know that I have heard concerns 
from constituents about the recommendation to establish a new Postal 
Regulatory Board. This entity would replace the current Postal Rate 
Commission and significantly expand its authority. What are your views 
on this proposal?
    Answer. We understand the rationale the President's Commission has 
defined for the Postal Regulatory Board. Yet regulators are normally 
required to operate within limits and guidelines. Regulated private 
companies and their shareholders have legal protections against 
arbitrary action by the regulator that the Postal Service cannot have 
as a government institution.
    At the least, there should be standards drawing a clear line 
between what is appropriately a managerial function within the 
oversight of the Governors or Directors, what is a regulatory function 
committed to the regulator, and what is a public policy function 
reserved to the Nation's lawmakers.
    For instance, the Postal Regulatory Board can revisit the vital 
national issues of the postal monopoly and universal service. These are 
clearly issues of broad public policy that should be resolved as part 
of our management responsibilities, as determined by Congress.
    They are not regulatory issues. Without defined limits or 
guidelines, the regulator could conceivably limit the monopoly in such 
a way as to jeopardize universal service or even redefine the scope of 
the Nation's mail service itself.
    The powers of the proposed Postal Regulatory Board could also 
affect the outcome of the collective-bargaining process. The Postal 
Service has been, and continues to be, a strong supporter of collective 
bargaining. This process of give and take assures that the interests of 
our employees--and the unions that represent them--are considered 
within the larger picture of the Postal Service's financial situation 
and the needs of our customers.
    By determining the range within which wages may be negotiated, the 
Postal Regulatory Board could impede the ability of the parties to 
successfully negotiate agreements.

                     REVENUE FOREGONE REIMBURSEMENT

    Question. Mr. Potter, I understand that for the first time ever, 
the fiscal year 2005 President's Budget does not include the $29 
million reimbursement to the Postal Service for the revenue foregone 
debt. Do you know why this has occurred? Do you consider this a 
violation of the agreement that has been in operation since the early 
1990's when legislation was enacted that promised the Postal Service 
$29 million annually from 1994 through 2035?
    Answer. The Office of Management and Budget (OMB) did not provide 
us with their rationale for not including our request for payment of 
earned but unpaid Revenue Foregone appropriations in the President's 
fiscal year 2005 budget request.
    In a December 3, 2003 letter to OMB Director Bolton, the Postal 
Service formally requested that OMB reconsider the funding reductions 
of the Postal Service, including reductions in revenue foregone 
payments, which OMB had proposed to include in the President's budget 
request. An OMB official verbally informed us on December 17 that our 
requested changes had been denied.
    In accordance with the Revenue Foregone Act of 1993, the Postal 
Service is to receive $29 million annually through 2035. These 
payments, totaling $1.2 billion, cover the cost of services we provided 
in fiscal years 1991 through 1993, but for which there were 
insufficient amounts appropriated. They also cover payment for services 
provided from fiscal year 1994 through 1998. The payment requested for 
fiscal year 2005 would be the twelfth in the series of scheduled 42 
annual payments.
    In an unusual departure from past Presidential budget submissions, 
the 2005 budget is silent on this statutory reimbursement. The Postal 
Service is required under generally accepted accounting principles to 
reduce the value of an amount receivable to reflect any uncertainty as 
to full payment. As a result, the failure to receive these funds may 
require the Postal Service to treat these remaining payments, which 
amount to nearly $900 million, as a bad debt, significantly increasing 
our costs. As we work to address our long-term obligations in a 
responsible manner, it is counterproductive to increase costs by 
writing off a debt deferred by interest-free installment payments 
spread over a period of 42 years.
    The second part of our request is for $75.9 million for free mail 
for the blind and for overseas voting materials, as defined by statute. 
This provides funding for the free mailing of materials used by the 
blind and others who cannot use or read conventionally printed 
materials. It also includes absentee balloting materials that can be 
mailed free by members of the armed forces and other United States 
citizens residing outside of the United States, and balloting materials 
that can be mailed in bulk between State and local elections officials.
    Our appropriations request for free mail differs from the 
President's budget proposal of $61.7 million. The President's budget 
proposes to continue the practice of ``advance'' funding the amount 
requested for free mail. This means that funding is ``advanced'' until 
the fiscal year following the actual mailings and not made available to 
the Postal Service until after these mailings have been handled and 
delivered. The Postal Service is not authorized to control or limit 
these mailings to reduce the funding needed. And while that is not a 
role we seek, the simple fact is that we have no way to mitigate the 
shortfall in funding. Providing less than the requested amount will 
only compound the financial burden caused by the current ``advance'' 
funding.
    The amounts due under this Act are for the absolute nominal costs 
incurred related to services previously performed. The Act's 
requirements to reimburse the Postal Service over an extended time 
period with no payment of interest places additional cost burdens on 
other postal rate payers. For this reason, the Postal Service in the 
past has requested an accelerated repayment program.

                          POSTMASTER VACANCIES

    Question. According the Postal Service, there are more than 1,600 
post offices with postmaster vacancies. Please explain what steps are 
being taken to fill these postmaster slots.
    Answer. Six hundred of the current 1,600 vacancies consist of 
emergency closings and/or other non-vacancy, leaving about 1,000 valid 
vacant postmaster positions. The attrition rate in the Postal Service 
is about 5 percent, which equates to approximately 1,380 (5 percent of 
the total post office count of 27,620). With about 1,000 currently, we 
are below the number of postmaster vacancies that would be expected. 
The entire hiring and promotion process takes, at the very least, 90 
days and includes the following: vacancy announcement posting, review 
of applications, interview of the most eligible applicants, and 
generating the selection and non-selection communication.
    Vacant post offices are often used to develop employees who have 
identified the position of postmaster as a career goal, with the 
average developmental assignment lasting about 90 days. As positions 
are filled, others become vacant, which creates a constant vacancy rate 
of about 3 to 5 percent or 830 to 1,380 positions. The Postal Service 
is currently within that range.
                                 ______
                                 
             Questions Submitted by Senator Robert C. Byrd

    Question. The administration has proposed to permanently repeal the 
annual appropriation for foregone revenue. What effect do you 
anticipate the permanent repeal of this appropriation would have on 
postal rates?
    Answer. The receipt of these funds for past services performed is 
used to pay for current-period expenses. Accordingly, if the funds are 
not received, the price of stamps will increase directly related to 
these costs.
    If the entire sum were written off as bad debt, postal rates could 
increase by approximately 0.5 percent in the year of the write-off. In 
each of the remaining years of the payment period, lesser, but direct, 
rate increases would result.
    On average we would expect the rate increase to be similar for all 
mailers. However, since commercial mail comprises more than 70 percent 
of all mail, we would expect that in terms of absolute dollars, 
commercial mailers would shoulder the greatest burden.
    If any of the payments due as specified in the Revenue Foregone 
Reform Act of 1993 are not received, the loss in reimbursement for 
services performed will increase postal rates directly. Accordingly, 
postal rate payers will fund the hundreds of millions in debt 
authorized to be paid through appropriation.
    Question. Under postal pension reform legislation (Public Law 108-
18) enacted last year, the U.S. Postal Service will be required to 
assume all pension costs associated with Postal employees with military 
experience. What effect do you anticipate that this provision will have 
on postal rates?
    Answer. The Postal Service has submitted two proposals concerning 
the disposition of these funds. Our first proposes that the United 
States Treasury again be required to fund all CSRS costs associated 
with the military service of Postal employees and retirees. Our second 
proposal assumes that responsibility for funding military service costs 
is transferred to the Postal Service.
    Under the first proposal, in fiscal year 2006, the Postal Service 
will contribute $5 billion to fund and pre-fund retiree health benefits 
for all career employees; under the second proposal it will contribute 
$1.9 billion to fund retiree health benefits and to pre-fund retiree 
health benefits for career employees hired after fiscal year 2002. The 
difference in the amounts reflects the fact that returning the funding 
of CSRS costs of military service to the Treasury increases the 
``savings'' under the Act, and makes available additional funds that 
can be used to pre-fund retiree health benefits for career employees.
    Both proposals address funding retiree health benefits, which we 
estimate to be valued at between $40 and $50 billion, depending on the 
long-term medical inflation assumption used, at the end of fiscal year 
2002. At the end of fiscal year 2003, post-retirement health benefit 
obligations were estimated to be valued between $47 billion and $57 
billion.
    Each proposal stands on its own merits. Neither was designed around 
its impact on rates.
    The first proposal returns to the U.S. Treasury the responsibility 
for funding CSRS pension costs earned by military service of Postal 
Service employees and uses funds made available from this adjustment to 
pre-fund retiree health benefits cost for current Postal Service 
employees. However, to provide the required level of funding, an 
additional $1.2 billion in funds would be necessary, causing a 2 
percent increase in rates.
    In our second proposal, it is assumed that the transfer of CSRS 
military service costs to the Postal Service is not reversed and that 
retiree health benefits is pre-funded only for new employees hired 
after fiscal year 2002, when the pension funding reform legislation was 
enacted. This would require approximately $200 million more in 
additional funds, causing a 0.3 percent increase in rates. It would be 
possible to select arbitrarily a different hire date for funding 
employee retiree health benefits for new employees to match the 
additional funding requirement of $1.2 billion, but it would be just 
that, arbitrary.
    Question. What are the likely financial ramifications of the 
sequestration of the U.S. Postal Service's Civil Service Retirement 
System (CSRS) contribution savings as a result of Public Law 108-18?
    Answer. Under this reform legislation, it will be necessary to 
include the ``savings'' as an expense in the revenue requirement of 
future rate filings. Therefore, in order to obtain funds to place in an 
escrow account in fiscal year 2006, a 5.4 percent increase in postage 
rates will be required unless the law is amended. Additionally, bi-
annual postage rate increases between 1.0 percent and 1.5 percent would 
be necessary just to cover the escrow requirements over the next 15 
years. These escrow-driven rate increases will cause further declines 
in mail volume, contributing to the need for higher additional rate 
increases in order to fund the ever expanding delivery network.
    Question. How will the repeal of the foregone revenue 
appropriation, the assumption of military pension costs, and the 
sequestration of CSRS pension savings affect the Postal Service's long-
term transformation?
    Answer. These actions, all of which require the Postal Service to 
subsidize the Federal Government, are nothing more than a transfer of 
its obligations from taxpayers to postal ratepayers. These transfers, 
totaling billions of dollars, will jeopardize the financial viability 
of the Postal Service and its long-term transformation efforts. It 
makes no sense in any circumstance to retroactively transfer such costs 
to the Postal Service, a self-sustaining public organization. But, in 
order to defray the financial obligations of the Federal Government, 
these actions would: transfer to the Postal Service the Federal 
Government's obligations of over $27 billion for military service 
pension costs; deny the Postal Service nearly $900 million in revenue 
foregone funds due for services it provided between 1991 and 1998; and 
deprive the Postal Service of an estimated almost $70 billion of its 
own pension over-funding. Further, in 2006, the Postal Service will be 
required to place the ``savings'' resulting from the Act in an escrow 
fund that, over time, would require postal rate payers to pay higher 
rates in order to fund the additional $70 billion escrow requirement. 
Taxing the Postal Service with these transfers at this time ignores the 
organization's critical business needs and the significant financial 
challenges resulting from declining mail volumes and the requirement to 
fund an ever expanding delivery network necessary to provide universal 
service.
    Further, implementing these cost transfers to the Postal Service 
would ignore the stated concerns of the President's Commission on the 
United States Postal Service regarding the fiscal health of the Postal 
Service and would run counter to the Commission's recommendations for 
actions necessary to institute a transformative business model for the 
Postal Service.
    Question. What is the status of the implementation of the Postal 
Service's Emergency Preparedness Plan?
    Answer. The Emergency Preparedness Plan covers four major areas: 
health-risk reduction, detection, intervention, and decontamination. 
First and foremost, we have been working swiftly over the past 2 years 
to ensure the safety and security of our employees and customers. While 
many efforts are underway, we are accomplishing this monumental task 
primarily through the development of leading-edge technologies and 
changes to our standard operating procedures.
Health-Risk Reduction
    We have introduced improved standard operating procedures, 
including the use of High Efficiency Particulate Air (HEPA) vacuums to 
clean our mail processing equipment. Additionally, the Postal Service, 
in conjunction with the National Institute of Occupational Safety and 
Health (NIOSH), developed Ventilation and Filtration Systems (VFS). 
These systems are installed on key mail processing machines and 
function to collect and contain airborne particulates from the machines 
during mail processing operations. We have purchased over 1,300 systems 
to be deployed at our 282 major mail processing centers nationwide. 
National deployment of the systems began in April 2004.
Detection
    The Postal Service has developed the Biohazard Detection System 
(BDS) to act as an early warning system against the threat of 
biohazards that may enter our mail network. We currently plan to 
install 1,708 detection systems at 282 facilities nationwide. National 
deployment of the BDS began in April 2004 and we currently have a total 
of 32 BDS systems in operation.
    In accordance with our threat assessment, we are also reviewing 
upgrades to the BDS that will allow for the detection of additional 
threats including toxins such as Ricin.
Intervention
    We continue to irradiate government mail prior to its delivery. 
This process neutralizes hazardous substances that may be contained in 
the mail. We are meeting this commitment by contracting with IBA in 
Bridgeport, NJ to irradiate and sanitize the government mail. 
Additionally, we are considering plans to build and operate our own 
irradiation facility specifically designed to meet our needs. The 
facility will significantly reduce our annual operating expenses and 
improve our service with respect to government mail.
Decontamination
    We have successfully decontaminated both Postal Service facilities 
that where closed due to the anthrax attacks of 2001. The Curseen/
Morris facility (formerly known as the Brentwood facility) in 
Washington, DC resumed operations in December of 2003 and continues to 
operate today. The Trenton, NJ facility was successfully decontaminated 
in February 2004. Efforts are underway to refurbish this building and 
it is expected to begin operations in early 2005.

                          SUBCOMMITTEE RECESS

    Senator Shelby. We wish you well and thank you for 
appearing with us.
    Mr. Potter. Thank you, Mr. Chairman.
    Senator Shelby. The subcommittee is recessed.
    [Whereupon, at 11:14 a.m., Thursday, April 1, the 
subcommittee was recessed, to reconvene subject to the call of 
the Chair.]
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