    [Senate Hearing 108-213]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 108-213

     U.S. POSTAL SERVICE: WHAT CAN BE DONE TO ENSURE ITS FUTURE VIABILITY?

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

                                    HEARING

                                   before the

                                  COMMITTEE ON
                              GOVERNMENTAL AFFAIRS
                              UNITED STATES SENATE

                          ONE HUNDRED EIGHTH CONGRESS

                                 FIRST SESSION

                                   __________

                               SEPTEMBER 17, 2003

                                   __________

          Printed for the use of the Committee on Governmental Affairs

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                       COMMITTEE ON GOVERNMENTAL AFFAIRS

                       SUSAN M. COLLINS, Maine, Chairman
    TED STEVENS, Alaska                  JOSEPH I. LIEBERMAN, Connecticut
    GEORGE V. VOINOVICH, Ohio            CARL LEVIN, Michigan
    NORM COLEMAN, Minnesota              DANIEL K. AKAKA, Hawaii
    ARLEN SPECTER, Pennsylvania          RICHARD J. DURBIN, Illinois
    ROBERT F. BENNETT, Utah              THOMAS R. CARPER, Delaware
    PETER G. FITZGERALD, Illinois        MARK DAYTON, Minnesota
    JOHN E. SUNUNU, New Hampshire        FRANK LAUTENBERG, New Jersey
    RICHARD C. SHELBY, Alabama           MARK PRYOR, Arkansas

               Michael D. Bopp, Staff Director and Chief Counsel
                      Ann C. Fisher, Deputy Staff Director
       Joyce A. Rechtschaffen, Minority Staff Director and Chief Counsel
                       Susan E. Propper, Minority Counsel
                          Amy B. Newhouse, Chief Clerk

                                C O N T E N T S

                                     ------
    Opening statements:
                                                                       Page
        Senator Collins..............................................     1
        Senator Lautenberg...........................................     4
        Senator Durbin...............................................     5
        Senator Dayton...............................................     6
        Senator Carper...............................................    14
        Senator Akaka................................................    17
        Senator Fitzgerald...........................................    18
        Senator Pryor................................................    27
    Prepared statements:
        Senator Coleman..............................................    39
        Senator Lieberman............................................    39
        Senator Stevens..............................................    41

                                    WITNESS
                         Wednesday, September 17, 2003

    James A. Johnson, Co-Chair, Presidential Commission on the U.S.
      Postal Service, and Vice Chairman, Perseus, LLC
        Testimony....................................................     6
        Prepared Statement...........................................    42

                                    Appendix

    Questions and Responses for the Record for Mr. Johnson from:
        Senator Collins..............................................    58
        Senator Carper...............................................    65
        Senator Stevens..............................................    69

     U.S. POSTAL SERVICE: WHAT CAN BE DONE TO ENSURE ITS FUTURE VIABILITY?

                                  ----------

                         WEDNESDAY, SEPTEMBER 17, 2003

                                           U.S. Senate,
                             Committee on Governmental Affairs,
                                                        Washington, DC.
        The Committee met, pursuant to notice, at 10 o'clock a.m.,
    in room SD-342, Dirksen Senate Office Building, Hon. Susan M.
    Collins, Chairman of the Committee, presiding.
        Present: Senators Collins, Fitzgerald, Akaka, Durbin,
    Carper, Dayton, Lautenberg, and Pryor.

                 OPENING STATEMENT OF CHAIRMAN COLLINS

        Chairman Collins. The Committee will come to order.
        This past December, President Bush announced the creation
    of a bipartisan Commission charged with identifying the
    operational, structural, and financial challenges facing the
    U.S. Postal Service. The President charged this Commission with
    examining all significant aspects of the Postal Service with
    the goal of recommending legislative and administrative reforms
    to ensure its long-term viability.
        Harry Pearce, the chairman of Hughes Electronics
    Corporation, and James Johnson, the vice chairman of Perseus,
    LLC, were appointed by the President to serve as the
    Commission's co-chairmen. I very much welcome Mr. Johnson here
    today, and I regret to announce that due to illness, Mr. Pearce
    is unable to join us here today as planned. He was an
    invaluable participant in the development of the Commission's
    final report, and I sincerely regret that illness prevents him
    from joining us today. I wish him, and I know that Mr. Johnson
    joins me in wishing him a speedy recovery.
        Mr. Johnson, I want to begin this morning by thanking you
    for your tremendous effort in putting together a highly
    comprehensive report on an extremely complex issue. In a
    limited amount of time, you and Mr. Pearce conducted seven
    public hearings across the country and heard from countless
    witnesses.
        On July 31, the Commission released its final report,
    making 35 legislative and administrative recommendations for
    the reform of the Postal Service. You and the eight other
    members of the Commission committed yourselves fully to a
    daunting task, and I want to congratulate you on your fine
    work.
        As I read through the Commission's report, I was struck by
    what I considered to be the Commission's wakeup call to
    Congress, your statement that ``An incremental approach to
    Postal Service reform will yield too little too late given the
    enterprise's bleak fiscal outlook, the depth of the current
    debt and unfunded obligations, the downward trend in First-
    Class mail volumes, and the limited potential of its Legacy
    Postal Network that was built for a bygone era.''
        That is a very strong statement and one that challenges
    both the Postal Service and Congress to embrace far-reaching
    reforms.
        To the relief of many, myself included, the Commission did
    not recommend privatization of the Postal Service. Instead, the
    Commission worked toward finding a way for the Postal Service
    to do, as Mr. Johnson described it to me, ``an overwhelmingly
    better job under the same general structure.''
        The Commission's recommendations are designed to help the
    225-year-old Postal Service remain viable through at least the
    next two decades.
        The financial and operational problems confronting the
    Postal Service are serious indeed. At present, the Postal
    Service is paying down $6.5 billion in debt to the U.S.
    Treasury, and its long-term liabilities are enormous, to the
    tune of nearly $6 billion for workers' compensation claims, $5
    billion for retirement costs, and perhaps as much as $45
    billion to cover retiree health care costs.
        In an unexpected turn of events last year, the Office of
    Personnel Management discovered that if postal payments into
    the Civil Service Retirement System fund were to continue on
    the basis required under existing law, the Postal Service would
    overfund its estimated liability by approximately $71 billion
    over a period of 60 years. To correct this overfunding problem,
    Senator Carper and I introduced bipartisan legislation in
    February. It was enacted and signed into law this past April,
    and thus, the result is that the Postal Service has been able
    to delay its next rate increase until 2006 and has been able to
    pay down more aggressively the billions of dollars in debt owed
    to the U.S. Treasury.
        Despite this reprieve, however, many challenges remain. It
    is important to understand the impact of the Postal Service on
    our economy. The Postal Service itself employs more than
    750,000 career employees. Less well-known is the fact that it
    is also the linchpin of a $900 billion mailing industry that
    employs 9 million Americans in fields as diverse as direct
    mailing, printing, catalog production, and paper manufacturing.
        The health of the Postal Service is essential to the
    vitality and the economic viability of thousands of companies
    and the millions of Americans that they employ. One of the
    greatest challenges for the Postal Service is the decrease in
    mail volume as business communications, bills and payments move
    more and more to the internet. The Postal Service has faced
    declining volumes of First-Class mail for the past 4 years.
    This is highly significant given that First-Class mail accounts
    for 48 percent of total mail volume, and the revenue it
    generates pays for more than two-thirds of the Postal Service's
    institutional costs.
        The Postal Service also faces the difficult task of trying
    to cut costs from its nationwide infrastructure and
    transportation network. These costs are difficult to reduce.
    Even though mail volumes may be decreasing, carriers must still
    deliver 6 days a week to more than 139 million addresses even
    if they are delivering fewer letters.
        Despite much discussion about reforming the Postal Service
    and previous attempts by some of our colleagues in the House of
    Representatives to do so, the diverse views of what shape
    postal reform should take, if any, have only led to stalemates
    in the past. To take a fresh look at these issues, last July, I
    introduced a bill to establish a Presidential Postal Commission
    charged with examining the problems the Postal Service faces
    and developing specific recommendations and legislative
    proposals that Congress and the Postal Service could implement.
        You can imagine my pleasure that the President moved ahead
    with just such a Commission, and today we are hearing the
    results of those efforts. In many ways, the work of the
    Commission builds upon work already started by the Postal
    Service. At the request of the Senate, Postmaster General Jack
    Potter delivered to Congress in April of last year a
    comprehensive Transformation Plan designed to ensure the
    continuation of affordable universal service and to prepare the
    organization for the challenges of change in a dynamic
    marketplace.
        The Postal Service has determined what changes could be
    made within existing constraints that would result in improved
    operations, performance and finances. The Transformation Plan
    has been widely recognized as a good first step, but that is
    exactly what it is--a first step. Without legislation, many of
    the necessary reforms highlighted in the Commission's report
    simply will not happen.
        In closing, I would like to say that as a Senator
    representing a large rural State, I greatly appreciate the
    Commission's strong endorsement of the basic features of
    universal service--affordable rates, frequent delivery, and
    convenient community access to retail postal services.
        It is important to me that my constituents, whether they
    are living in the far reaches of Northern Maine or out on an
    island or in our many rural small towns, have the same access
    to the Postal Service as the people of our large cities. If the
    Postal Service were to no longer provide universal service and
    deliver mail to every customer, the affordable communications
    link upon which many Americans rely would be jeopardized. Most
    commercial enterprises would find it uneconomical if not
    impossible to deliver mail and packages to rural Americans at
    the rates that the Postal Service has been offering.
        The preservation of universal service and many more issues
    must be examined in depth if we are to save and strengthen this
    vital service upon which so many Americans rely for
    communication and for their jobs. The Postal Service has
    reached a critical juncture. It is time for a thorough
    evaluation of the Service's operations and requirements. It is
    time for action.
        This will be the first in a series of hearings that the
    Committee will hold to examine these important issues.
        Again, I want to commend the Commission for preparing this
    important report. We look forward to hearing your testimony,
    Mr. Johnson, and discussing with you the rationale behind some
    of the recommendations and what you recommend as the next steps
    in the effort to reform and preserve the Postal Service.
        Senator Lautenberg.

                OPENING STATEMENT OF SENATOR LAUTENBERG

        Senator Lautenberg. Thank you, Madam Chairman, and welcome,
    Jim Johnson.
        I have known Mr. Johnson for a long time, and when I see
    him, I am not sure whether he is representing the cultural
    concerns of the community, the banking concerns of the
    community, or, in old days, the political concerns, but I think
    he has put those aside for better pursuits. We always know that
    where Jim Johnson lends a hand, things usually come out very
    well. I will have to reserve a little judgment until I have a
    chance to study the proposal a little bit longer, but I am
    certainly glad to see you here, Jim.
        Postal reform is an incredibly important national issue,
    and most Americans do not spend a lot of time thinking about it
    until the mail is not there in the time frame that they expect,
    or there is a request or suggestion that maybe Saturday mail be
    eliminated or curtailment of service in any way, because
    although it is costly and at times cumbersome, the fact is we
    love it, and we like what the Postal Service represents.
        There are a couple of things that have to be of concern as
    we look at reform. One is to be able to guarantee that the
    basic service is available and at the same time, that the
    staff, the loyal employees of the Postal Service, have their
    rights protected. If change is to be made, they have to be
    consulted, and we have to respect their views and ideas. It
    does not mean that we are going to agree with every one of
    them, but certainly we want to hear what they have to say.
        The importance of the U.S. Postal Service to our national
    economy cannot be overstated. An example is that a 2-year delay
    in postal rate increases has the potential to save publication
    companies like AOL-Time Warner--I guess it is now just Time
    Warner--approximately $200 million in mailing costs. Last year
    alone, the U.S. Postal Service delivered more than 200 billion
    pieces of mail. So the important role that the Postal Service
    plays in our economy and the contribution of its 843,000
    dedicated employees, as I said earlier, cannot be overlooked or
    taken for granted.
        Having said that, this is indeed a time of great change for
    the Postal Service. Things that are not directly related to the
    performance of the Postal Service's duties, but are rather
    technology changes, have had a vast impact. As the President's
    Commission has observed, traditional mail streams will likely
    continue to migrate to cheaper, internet-based alternatives.
    And given the existing regulatory structure, the Postal Service
    debt is likely to increase every year, making it tougher for
    the Postal Service to achieve its fundamental mission of
    universal service.
        I support the Commission's recommendation to make the rate-
    setting process less cumbersome and more efficient, but I want
    to take a second look at the Commission's labor reform
    proposals--at one of them. As a former businessman, I
    understand the need to make the work force as lean and
    efficient as possible, but restricting employees' collective
    bargaining rights, privatizing jobs, and increasing executive
    compensation, will not solve all of the Postal Service's
    organizational and workplace problems nor improve employee
    morale or efficiency. And I would hope that I could be found to
    improve the process, the collective bargaining process but, as
    I said in my opening comment, encouraging the views and the
    ideas of the people who are on the front line performing; they
    have the best knowledge bank of all.
        So I look forward, Madam Chairman, to hearing from Mr.
    Johnson and to try to resolve in whatever way we can some of
    the tension that exists there but at the same time to make
    certain that the people in this country know that the Postal
    Service is going to be there to provide them with the service
    they need.
        Chairman Collins. Thank you, Senator Lautenberg.
        Senator Durbin.

                  OPENING STATEMENT OF SENATOR DURBIN

        Senator Durbin. Thank you very much, Madam Chairman, and
    thank you for this hearing.
        Jim Johnson, thank you for your public service. You
    continue to add to our country with everything that you have
    volunteered to step forward to do, and this is no exception.
        I, for one, believe that we should start this hearing
    keeping two things in mind which I think your Commission began
    with. First, our commitment to universal mail service. It
    distinguishes the United States as a Nation, and I think it is
    something that we need to preserve and work hard to make
    certain that in the 21st Century, it meets modern standards.
        I was encouraged by your recognition of what the Internet
    and email have done to mail volume and what they are likely to
    do in the future. I think that addressing that head-on is
    honest and is an indispensable part of a realistic evaluation
    of the future of the Postal Service, and I thank you for that.
        Second, I want to commend my colleagues and the good work
    of our fellow Senator, George Voinovich of Ohio, who has since
    he has come to this Committee really focused on an element that
    is essential to quality service in the Federal Government. He
    has focused on the people of the Federal Government. Beyond the
    obvious box charts and good thoughts that we might have about
    organization and structure, in the final analysis, the success
    of every agency of the Federal Government, from our great
    military to the men and women who serve in so many different
    agencies, depends on their skills and their morale and their
    commitment to excellence. And I think that as we talk about the
    future of the Postal Service, we should never discount that. So
    long as we have excellent men and women serving our country in
    the Postal Service, I think we have the greatest potential to
    develop it into the 21st Century in a fashion that is
    essential.
        I want to echo what Senator Lautenberg has said. Many of
    the workers of the Postal Service look at this report with a
    lot of concern as to whether or not it is going to recognize
    them as individuals, is going to give them the kind of dignity
    that they deserve in the workplace. And I hope that we can find
    the right balance. We have to say to them that as a team
    approach, we need to find better ways to reach excellence in
    performance, and we need to do it recognizing your worth as an
    individual and your importance to a team effort.
        I think we also have to say to those who are critics of the
    Postal Service--and there are many out there, from late night
    talk shows to people on Capitol Hill--that if they can find
    another place in the world where, for 37 cents, you can get a
    letter delivered 2,000 miles away within a few days, please
    tell me where that is. I just do not think that is something we
    should ever take for granted, and I hope that becomes the
    bottom line of our conversation here.
        Thank you very much.
        Chairman Collins. Senator Dayton.

                  OPENING STATEMENT OF SENATOR DAYTON

        Senator Dayton. I think that is true everywhere in America
    except for the mail that comes to the Capitol.
        Senator Durbin. That is true.
        Senator Dayton. Madam Chairman, I want to commend you for
    taking on this subject. After grappling with the Department of
    Defense, I am glad you picked something simple like the Postal
    Service. Most people would not take on both of those in a
    lifetime much less in the same year. So thank you very much for
    your leadership on these and other issues.
        One reason I am in the U.S. Senate from Minnesota is
    because Mr. Johnson decided to stay in Washington rather than
    go back and run for political office in his home State of
    Minnesota. Anybody with a name that ends in ``-son'' in
    Minnesota has a natural advantage of about a quarter million
    votes. But he found opportunities to make even more
    distinguished service and contributions to our country in
    Washington. He is a proud native son of Minnesota, and we are
    proud to have him as a native son, and I look forward to his
    remarks.
        Chairman Collins. Thank you.
        I am now pleased to introduce our witness who clearly is
    well-known to those on the Democratic side of the aisle on this
    Committee--James Johnson, who is vice chairman of Perseus, a
    merchant banking and private equity firm here in Washington.
        He is well-known not only for his political work but for
    his 10 years at Fannie Mae, having served as vice chairman,
    chairman, and CEO and as chairman of the Executive Committee.
    Prior to joining Fannie Mae, Mr. Johnson served as president of
    Public Strategies, a Washington-based consulting firm which
    advised corporations on strategic issues. He has also served as
    an executive assistant to former Vice President Walter Mondale,
    another Minnesota connection, and is the recipient of numerous
    awards and degrees.
        Again, we are very pleased to have you here today, and I
    want to thank you on behalf of all my colleagues for your very
    diligent and impressive work in producing this comprehensive
    report.
        We look forward to hearing from you. Take as much time as
    you need for your statement.

       TESTIMONY OF JAMES A. JOHNSON,\1\ CO-CHAIR, PRESIDENTIAL
       COMMISSION ON THE U.S. POSTAL SERVICE, AND VICE CHAIRMAN,
                              PERSEUS, LLC

        Mr. Johnson. Thank you very much, Madam Chairman.
    ---------------------------------------------------------------------------
        \1\ The prepared statement of Mr. Johnson appears in the Appendix
    on page 42.
    ---------------------------------------------------------------------------
        I want to compliment you for the extraordinary intelligence
    and discipline with which you have approached this issue. You
    have become a real leader in this area, and I have no doubt
    that by virtue of you chairing this Committee, the end result
    of these recommendations and the reform effort will be
    substantially better.
        To my friends, colleagues, long-time associates, thank you
    so much for your opening remarks. I am delighted that each of
    you are here, and I understand and embrace the spirit of your
    opening remarks. I would like to address many of those concerns
    as directly as possible.
        What I am going to do is not read back through the
    testimony which we presented but rather just highlight a few of
    the recommendations, Madam Chairman, that we think are most
    significant and also try to give a little background to our
    thinking as a Commission.
        I should say that the Commission staff did an excellent
    job. Dennis Shea is here this morning and other members of the
    staff are also here. They did a wonderful job. I also think
    that the eight other members of the Commission deserve a real
    public thank you. These are people who gave hundreds and
    hundreds of hours. All of us came to this very complex
    challenge with no real background in postal issues. A lot of us
    had substantial background in large organizations, in corporate
    issues of various kinds and thinking through logistics
    businesses or service businesses, but we were new to this
    issue. I think all of the people sitting behind me in this room
    certainly knew more when I began and probably know more today.
    But we did make a very substantial, honest effort to take a
    look at these complex issues and offer you our best thoughts.
        We do not consider ourselves to have the last word or the
    final word on any of these issues. We have a perspective which
    is informed by our role in the business world largely, some
    small business, some large business, some in the public policy
    world, so we welcome the dialogue. We were not writing
    legislation; we were writing perspective, and the perspectives
    that we gave are an honest effort by all of us to keep the
    focus on reform, keep the focus on a better Postal Service, and
    to keep appropriate focus on everyone who contributes to that.
    I am very grateful to you for leading this effort in the
    Senate.
        Let me just give a little bit of context at the beginning.
    As you and your colleagues have pointed out, this is tricky
    business. What we have here is a very large enterprise which is
    designed to break even, to deliver hundreds of billions of
    pieces of mail, to not have excessive costs to the ratepayers,
    to have universal service, and above all to not be a threat
    ultimately to the taxpayer.
        We are trying to balance a lot of things at once and do it
    in a very complex organization.
        The very first conclusion that the Commission came to is
    that the work of the Congress more than 30 years ago was very
    good work. In fact, this basic construct was a very sound basic
    construct and we should not be looking at radical privatization
    alternatives, we should not be looking at ways of subsidizing
    this in tax dollars. But we should find a way if we possibly
    can to make the most efficient, most effective postal system
    that could stand on its own two feet, that could break even
    over time, that could manage its responsibilities and its
    obligations along with the rate-setting process so that it
    would have adequate revenues, adequate growth, more than
    adequate service, and in the end be an institution that all
    Americans can respect and value.
        As part of our effort, we did an opinion survey. Peter Hart
    from The Wall Street Journal and Linda Duval led the effort,
    one traditionally on the Republican side, one traditionally on
    the Democratic side. What we found is that the Postal Service
    is among the very most respected institutions in America. This
    is not a broken institution. This is a strong and respected
    institution. And it is very important that everybody keep in
    mind that Americans all over this country very highly value the
    services they receive and have great respect for the people who
    deliver those services.
        That was the broad context in which we began. We felt that
    as part of the future prospects, one of the things that we
    should focus on is making those services of the postal system
    even more easily available. We have a number of recommendations
    about how to extend the service, how to extend through retail
    outlets, more accessibility, how to get more service within
    easy reach of more people on a regular basis. And you will see
    in the report that that is a big part of our thinking.
        We were also concerned about organizational effectiveness
    in terms of the focus of the organization. So many
    organizations that have failed in America in the last 20
    years--Senator Lautenberg certainly knows about this from his
    corporate background--have failed because they have not kept
    the focus on their core mission; they have gotten involved in
    things that were not things they knew how to do.
        Therefore one of the core recommendations here is stick to
    your knitting. Do what you are supposed to be doing. Do not be
    looking for other ways of expanding into businesses where you
    do not have expertise, where you do not have a clear
    preparation and a clear background.
        The second recommendation in the mission and governance
    area--and this is also something that Members of the Committee
    I think will relate to very strongly--is that we all felt that
    there should be the best of corporate governance put in place.
    As part of that best of corporate governance, our strong belief
    was that we should now take advantage of the benchmarking that
    is going on among large organizations and put in place the
    characteristics of the most effective boards of directors in
    America today. We reached out to the Conference Board and to a
    lot of academic institutions, a lot of other institutions that
    are focusing on governance in a corporate setting, and made a
    set of recommendations for a new board of directors for the
    Postal Service, which we think are a sound set of
    recommendations.
        We were also very much aware of the fact that there are
    many public mission responsibilities for the Postal Service. It
    is supposed to operate in a businesslike manner, but it is not
    supposed to be a business that operates without the public
    sector and public mission very much in mind.
        We tried to craft a new regulatory approach with the postal
    regulator, with some broad authority for review but also very
    broad instructions not to be involved in trying to micromanage
    this large enterprise. Whether we got this exactly right or
    not, once again, is part of the dialogue of the next several
    months and longer.
        We said if there are major changes in universal service,
    really major, that should be a subject reviewed by the postal
    regulator. We said if there were extensions of monopoly
    activities, that should be reviewed by the postal regulator.
        We recommended setting up a new rate mechanism, trying to
    figure out a way to have a much speedier, much more efficient,
    but also fair rate-setting mechanism so that you wouldn't have
    this extended 18-month process which is currently part of the
    Postal Rate Commission structure. That is something that is
    going to require a lot of work to get it right. We think we
    have made some very useful suggestions, and as you think about
    legislation, obviously, you will have to decide whether or not
    we have gotten most of the dimensions right or not.
        We were also focused very strongly on the overall
    effectiveness of the postal system--the delivery system, the
    processing system--so that the enormous strides that have been
    made in corporate America in the last 20 years could be put in
    place within the context of the business efficiency and
    logistics requirements of the postal system. Many businesses in
    America today are operating dramatically more efficiently than
    before, with better technology, more modern organization,
    better assessment of the performance characteristics of all of
    the elements.
        Today, gentlemen, Madam Chairman, there are 446 postal
    facilities for processing, distribution, and bulk mail. We had
    a very substantial dialogue with the Postmaster General, Mr.
    Potter, and others about what would be the right sizing of the
    system--how many facilities there should be; how they should be
    integrated into a comprehensive network as opposed to
    facilities that were built at different times with different
    methodologies, with different characteristics, with different
    efficiencies. We came up with an idea which is not original--
    and I know that Senator Carper and others have expressed a lot
    of interest in this. After a lot of study of what happened with
    the Base Closing Commission we have created something that we
    chose to call the Postal Network Optimization Commission. This
    Commission would take recommendations from the Postmaster
    General, have an obligation to talk about them very broadly
    with all concerned parties, including the communities that
    would be affected, and come back with a proposal for a network
    modernization which we believe, the Postmaster General
    believes, virtually everybody who testified before our
    Commission believes, would yield a smaller number of
    facilities. I do not want in any way to try to say that is not
    the implication of this Commission. This is a Commission which
    says in its formation that we believe there are more facilities
    than are required for efficient performance, and we believe
    that some of them should be redesigned, many of them should be
    reconnected with each other in a smarter, more effective way,
    and that some of them should be closed.
        I think we have provided a mechanism for an enormous amount
    of public input; we have provided a mechanism for congressional
    review; we have provided a mechanism for the Postal Service to
    take the lead, and I think that is a promising recommendation.
        We also spent a lot of time talking about the enormous real
    estate assets of the Postal Service. There are, as you know,
    38,000 postal facilities--not all of them look like what you
    expect when you see a photo. Some of them are contract
    facilities; not all of them are large, not all of them have
    conceivable alternative uses. But we felt that with that
    enormous real estate holding, $15 billion in book value, very
    substantially more than that in all likelihood in market value,
    that we should be looking for ways to limit the overall cost of
    the leasing, the overall cost of the real estate owned, look
    for an active management of those real estate assets, so that
    as we are pressed to keep rates as low as we can and as we are
    pressed to keep this as a viable enterprise, we do not have
    substantial assets which are being underutilized.
        We also placed an emphasis on a lot of cost-saving
    mechanisms through work-sharing discounts, through outsourcing
    of postal function. Let me stop for just a moment on the
    outsourcing concept. This is something which I know has become
    extraordinarily controversial, something that people have
    talked about at great length.
        The Commission discussed this at great length, and today
    there are already between $10 and $20 billion of cooperative
    efforts between the private sector and the Postal Service. This
    is probably the leader--it is the leader, I am sure--of all
    public entities in terms of joint public-private partnership
    and cooperation and the intertwining of what is being provided
    by the government and by the private sector.
        We reviewed this. Some on the Commission were extremely
    aggressive about the potential of this. In the end, I and a
    couple of other Commission members said let us be absolutely
    clear here, and what guides us through all of this activity is
    best execution. We do not have an ideological preference of
    some kind here that we are putting on the table. What we are
    saying is that at every step of the way, best execution is the
    measure. If the best execution is a public execution through
    the postal employees who are in place today, then that is
    absolutely what should be done. If the best execution happens
    to be through a contracting mechanism where we can lower the
    cost and get greater efficiency and reliability, then we go in
    that direction. But this is not intended to be a wholesale
    reorientation. This is intended, as so many of our other
    recommendations, to be focused primarily on best execution.
    What would the best practices in corporate America tell us
    today about the lowest-cost, most efficient, most reliable
    execution for all of these functions that we are talking about?
        We also talked frankly about ways of enhancing the value of
    the Postal Service as it is designed today. As Senator
    Lautenberg pointed out, this is a huge enterprise and, as you
    pointed out in your opening remarks, $900 billion of activity
    in the United States economy. This Postal Service is a very
    valuable national asset and we should be thinking about how not
    only can we make it run efficiently as it might be threatened
    by electronic activities, but within the core of its mission.
    We should be thinking about ways in which it can be even more
    economically important, where it can be even more socially
    important, where it can interconnect our people even more
    effectively.
        We also had a growth orientation to this service function
    as well as making sure that we were always focused on best
    execution.
        In the financial areas the Commission more than anything
    else, embraced transparency. We believe that everything about
    this public enterprise should be transparent. We also had a
    dialogue with the SEC to talk about the best standards of
    transparency, reporting and visibility of financial reality
    that flows through their processes.
        We think the Postal Service should report quarterly the way
    major companies in America report quarterly to the SEC, meeting
    the highest standard of transparency.
        We also believe as we change this rate-setting mechanism,
    if we do, that we should be very much focused on an ongoing
    transparency about the allocation of costs within the Postal
    Service, that the form, content, and timing requirements of
    mail products and services should be clear for all to see how
    the Postal Service views this, how they allocate the costs. We
    all felt that the cost allocation in the present formulas was
    inadequate. We had some testimony on that point saying that it
    should go up to a dramatically higher level than it is today.
    Not all of us were of the view that that was possible, but
    higher than today in terms of the allocation of costs of the
    various products and services.
        Let me now talk about the more controversial piece of what
    the nine commissioners came to consensus on having to do with
    the work force--and I want to be very frank here and obviously
    will take whatever questions anybody has.
        We believe, the Postmaster General believes, and a number
    of other people believe that there are probably more employees
    today in the Postal Service as a whole than are required in the
    most efficient organization that could be put together. Many of
    the employees are eligible for retirement within a short time
    frame. Our belief is that one of the core responsibilities of
    the newly-constituted board of directors is to have a
    comprehensive human resources plan, not unlike any other major
    corporation in America. As you look at the work to be done, as
    you look at the challenges that you face, we believe that the
    board of directors should have a point of view about the
    optimum size of the work force, and with the retirements that
    are already expected, we believe that this can be done in the
    context of attrition. But we do not believe, with 76 percent of
    the overall expenses of the Postal Service, that this is
    something that should be ignored. It will be difficult. I
    believe the consultation that Senator Lautenberg talked about
    and I know others feel strongly about is essential to this. It
    cannot be done without full cooperation between management and
    the unionized labor force of the postal system. In the end,
    others may have a different point of view. But we nine
    citizens, in looking at this, came to believe that with the
    best technology, the best execution, the best rationalization,
    the best consideration of what was state of the art in terms of
    processing, distribution and all the other bulk challenges of
    the Postal Service, that with proper investment in technology,
    with proper orientation to capital investment over time, the
    postal work force would shrink. So we put that on the table. We
    do not know how much, we do not know over what period of time,
    but we believe that with that being 76 percent of the cost that
    you cannot do a credible report without saying that this is a
    core responsibility to right-size the work force. So we said
    it.
        Let me make another point--and this too is very
    controversial--on pay-for-performance. We had endless
    conversations within the Commission about what was the nature
    of financial incentive that should be part of a structure that
    is seeking to get to the highest level of performance. And we
    came up with a number of ideas. We had a lot of help from
    outside consultants. Let me just start with the bottom line,
    and that is that the Commission members unanimously believe
    that an appropriate, disclosed, broad-based reward for superior
    performance should be part of the incentive structure for the
    Postal Service.
        Many of the unionized representatives, or representatives
    of the unionized workers, did not think that was the right way
    to proceed. We listened to them in a variety of different
    contexts, publicly and privately. There is no doubt that there
    are issues in this area. We had an outside consultant talk to
    us about major companies with unionized work forces that did
    have pay-for-performance systems that they believed worked
    well. But this is not cookie-cutter business. This is something
    that would have to be shaped very carefully. We would have to
    make sure that none of those dimensions of favoritism and
    disruption of the work force that the labor representatives
    talked about came into play. But as a matter of conviction, all
    of the nine members of the Commission said we believe over time
    that we will have higher performance if we tie performance to
    superior work contribution. It is controversial, but it is
    something that we attacked and thought about.
        The next thing in the work force area is something that
    really flows directly from Capitol Hill, and this is something
    we also spent an enormous amount of time on, and that is pay
    comparability. When the Act was passed more than 30 years ago,
    it became the law of the land that there should be
    comparability between the people in the postal work force and
    people in comparable jobs in the private sector. That was
    principally motivated at the time because there was a feeling
    that there was inadequate compensation in the Postal Service,
    that they were not in fact meeting the standard of
    comparability to the private sector.
        We heard a great deal of testimony from people now saying
    that in their opinion, there was a premium on compensation in
    the Postal Service to comparable jobs in the private sector. We
    never came to a conclusion on that. The Commission does not
    have a point of view on that. There are individual members of
    the Commission who have a point of view, but one of the things
    that we worked through was not to have an opinion on pay
    comparability but to say this is the law of the land, this is
    what the Congress has so clearly stated, and we should
    recommend a mechanism to review whether or not in fact the law
    is being complied with.
        Now, obviously, at any time you want to change the law with
    the cooperation of your people in the House, you can change
    that law any way you want. We didn't know how to have a
    comprehensive report without addressing the issue of
    comparability. What we said was that there should be a thorough
    examination of this, that there should be a review of the most
    appropriate comparisons, and then there should be mechanisms
    put in place to assure that if it were not comparable, that
    with new employees hired, there should be a requirement that it
    be comparable. Once again, very controversial and something
    that no doubt you will discuss at great length.
        One of the things to keep in mind about all of the things
    that we said in the work force area is that none of the things
    that we recommended should be retrospective; nothing should
    affect current retirees, nothing should affect current
    bargaining agreements. These are things that should be
    considered for the future as opposed to affecting current
    employees.
        The final recommendation that I know you have talked about
    at great length already has to do with whether or not the
    Postal Service should have responsibility for military pension
    costs. We came down saying no, that this is an unusual burden
    and should not be a burden of the Postal Service. Lifting those
    pension costs obviously will have major economic implications
    and positive implications toward the Postal Service.
        So the core of our message, plain and simple--and I am
    sorry if I have gone on too long--plain and simple is that this
    is a fabulous national asset. The current structure and
    approach is the right structure and approach. We believe that
    there is no immediate crisis, but we believe that Congress
    needs to address many of these challenges that have been on the
    table this morning and have been on the table many times
    before. If we do not address the challenges now of having the
    most efficient, effective possible Postal Service, there will
    be a time when we will either have dramatic, and I think
    destructive, rate increases to keep the requirement of breaking
    even, the potential for a bailout, or dramatic reductions in
    service. We do not want any one of those three things. What we
    are trying to do with our recommendations is to push ahead by
    saying let us embrace universal service in the fullest sense of
    that definition, let us get it right as a large organization in
    terms of best execution, and then let us get the most we can
    possibly get out of this model so that we have the potential
    for the next 10 to 20 years of taking what is already a very
    effective institution, make it even better, and stabilize it
    within the context of its core definition.
        That is what we were trying to do. I have tried to give you
    a little background behind how we thought about a variety of
    these things. I am fully aware that not everyone will agree on
    all these topics, but I and all the other members of the
    Commission very much welcome the dialogue and are completely
    open to discussing our thinking on any one of these topics.
        Chairman Collins. Thank you very much, Mr. Johnson, for an
    excellent statement. Your written statement will be entered in
    the record along with any other materials that you wish to
    provide, but that overview was terrific, and I thank you.
        Senator Carper. Madam Chairman.
        Chairman Collins. Yes, Senator Carper.
        Senator Carper. Could I ask a point of personal privilege?
    We have been dealing with a natural disaster, a flooding
    problem, up in northern Delaware, and I have been engaged on
    that this morning and arrived too late to give an opening
    statement. Rather than give one, I would just ask for 2 minutes
    just to make a brief statement if I could.
        Chairman Collins. Certainly.
        Senator Carper has been very active on postal issues. We
    teamed up earlier this year on the postal bill that I mentioned
    in my opening statement.
        I am pleased to yield to you for some comments.

                  OPENING STATEMENT OF SENATOR CARPER

        Senator Carper. And I am pleased to be on your team.
        Chairman Collins. Just stay there. [Laughter.]
        Senator Carper. You can always look for me on your right
    flank.
        I love to tell this story, and I will be very quick. In my
    first year or so in the Senate, I was preparing to offer an
    amendment on the energy bill, something that was important at
    the time and is still an important issue. And Senator Collins
    was good enough to join me as a sponsor of the amendment, and
    we offered it. A lot of people thought we would lose, but we
    ended up winning by a lot, despite the opposition of the
    Chairman of the Committee and the Ranking Member.
        When it was all over, I went over to Senator Collins on the
    Senate floor, and I said, ``You know, I have not been here for
    that long, but this is the first time I have ever won a fight
    on a major amendment.'' And she looked at me and smiled and
    said, ``I have never lost.'' And I said, ``I am going to stick
    with you, sister.'' And I have.
        My hope is that we will be able to work closely together
    with our colleagues across the aisle here.
        Thirty-two years ago, another junior Senator, a fellow
    named Ted Stevens from Alaska, decided to get involved in
    postal issues, and he did, in a remarkably effective way, and
    laid the foundation for an organization which endured not only
    for the rest of the 20th Century but into the 21st Century. In
    1971, I do not know what the rest of you were doing, but I was
    in my second tour in Southeast Asia, and I remember reading
    something about it in Time or Newsweek magazines at the time.
    Thinking back to 1971, unlike our troops today who are deployed
    in Afghanistan, Kuwait, and other places, we did not have the
    ability to email our families, and frankly, we did not have the
    opportunity to talk to them much on the phone. We had a MARS
    system where you could actually talk a little bit on the
    phone--it was sort of like a Hamm radio operator--you could
    talk to them a little bit and say ``Over,'' and then they would
    talk back to you. But we did not have the ability to go into a
    tent or a facility and talk to our families then.
        We wrote a lot of letters. We got a lot of them back. They
    were all handwritten.
        We did not have direct deposit then.
        If you think about the way that our lives were in 1971 and
    the way we work today with direct deposit, email, and can call
    anybody with a cellphone almost around the world at any time,
    the world has changed dramatically, and our postal system needs
    to change and evolve as well.
        I am really pleased that the Commission--and I want to
    thank you and Harry Pearce for your leadership--and for all in
    the room and a lot of people who are not here who have
    contributed to your deliberations, to come with a very
    thoughtful set of recommendations. Now, obviously, we are not
    going to agree on all of them, and in particular I just want to
    make sure that in the end, we follow the golden rule with
    respect to the way we treat not just our customers but the
    folks who work at the Postal Service, that we treat them as we
    want to be treated.
        But I am pleased that you have said that universal service
    is important and we want to continue it. I am delighted that we
    are not going to try to privatize this operation. I am pleased
    with the importance and the premium that you have placed on
    employees as well.
        I will just conclude with this. Every now and then,
    Presidents send budgets to the Hill, and they are deemed ``dead
    on arrival.'' We see other proposals from Presidents, Democrat
    and Republican, and from other entities, they come to us and
    they are described as ``dead on arrival.''
        I think that the recommendations that you have sent to us
    are ``alive on arrival,'' and we very much look forward to
    working with you and improving some of them, accepting others,
    and going forward. I think this country will be better for it,
    and I think those who work for the Postal Service and their
    customers will be better for it.
        I thank you for the opportunity to make that comment.
        [The prepared opening statement of Senator Carper follows:]

                  PREPARED OPENING STATEMENT OF SENATOR CARPER

        Thank you, Madam Chairman. I'd like to begin by thanking Mr.
    Johnson and his colleagues for their willingness to serve on the
    President's postal commission. Postal reform is a difficult issue. It
    is also a vitally important issue for every American who depends on the
    Postal Service everyday. Their willingness to listen to all sides of
    the debate and to attemt to craft a set of balanced reform
    recommendations is admired and appreciated.
        By all accounts, the Postal Service has been a success. It receives
    virtually no taxpayer support and the service its hundreds of thousands
    of employees provide to every American nearly every day is second to
    none. More than 30 eyars after its birth, the Postal Service now
    delivers to more than 140 million addresses each day and is the anchor
    of a $900 billion mailing industry.
        As the commission's final report recognizes, however, the Postal
    Service is clearly in need of modernization. When it started out in
    1971, nobody had access to fax machines, cell phones or pagers and
    nobody imagined that we would ever see innovations like e-mail and
    electronic bill pay. After decades of success, electronic diversion of
    mail volume, coupled with economic recession and terrorism, have made
    for some rough going at the Postal Service in recent years.
        The Postal Service's financial situation has improved in recent
    months. They will have $4 billion surplus in the current fiscal eyar.
    They could be debt-free by the middle of next year. However, I don't
    think volume is yet where we'd like it to be. In addition, the Postal
    Service continues to add nearly two million new delivery points each
    year, creating the need for new routes, more letter carriers and new or
    expanded postal facilities.
        As more and more customers turn to electronic forms of
    communciation, letter carriers will likely begin to bring fewer and
    fewer pieces of mail to each address they serve. The rate increases
    that will be needed to maintain the Postal Service's current
    infrastructure, to finance retirement obligations to its current
    employees, and to pay for new letter carriers and new facilities will
    only further erode mail volume. The Postal Service has been trying to
    improve on its own. They are making progress, but there is only so much
    they can do.
        That is where Congress must step in. Even if the economy recovers
    soon and the Postal Service begins to see volume and revenues improve,
    I believe we will still need to make some fundamental changes in order
    to make the Postal Service as successful in the 21st Century as it has
    been for the past 30 years.
        That is where Congress must step in. Even if the economy recovers
    soon and the Postal Service begins to see volume and revenues improve,
    I believe we will still need to make some fundamental changes in order
    to make the Postal Service as successful in the 21st Century as it has
    been for the past thirty years.
        S. 1285, which I introduced early this past summer, aims to
    modernize the Postal Service without rolling back service. It instead
    explicitly preserves the requirement that the Postal Service ``bind the
    Nation together through the mail'' and serve all parts of the country--
    urban, suburban and rural. It also preserves the Postal Service's
    monopoly over the mailbox and maintains the prohibition on closing post
    offices in some rural and inner city communities that often operate at
    a deficit.
        S. 1285 also forces the Postal Service to concentrate solely on
    what it does best--processing and delivering the mail--and provides
    them with much-needed pricing flexibility that they can use to
    encourage increased mail volume. It does this while making the
    ratemaking process less time-consuming, less administratively
    burdensome and more predictable.
        S. 1285 also attempts to strengthen service standards for most
    Postal Service products as a way to make the mail more valuable for
    customers. The bill requires the Postal Rate Commission, re-named the
    Postal Regulatory Commission, to develop standards for the Postal
    Service's Market Dominant products, a category made up mostly of those
    products included in the postal monopoly.
        Finally, S. 1285 makes the new Postal Regulatory Commission the
    strong regulatory body needed to ensure that the Postal Service is
    serving the public interest and competing fairly with private sector
    mailers. Commissioners would be better qualified and would be armed
    with new authority, such as subpoena power, that can be used to demand
    information from postal management. Commissioners would also be
    empowered to punish the Postal Service for failing to abide by rate and
    service regulations or for using revenue from their monopoly products
    to subsidize those products that are also offered by private sector
    mailers.
        S. 1285 is based in large part on legislation introduced last year
    in the House by Congressmen John McHugh. While his bill enjoyed the
    support of much of the mailing community and most Postal Service
    employees and was endorsed by the Postal Service's Board of Governors,
    it failed in the Government Reform Committee. For any piece of postal
    reform legislation to be signed into law during the 108th Congress, it
    will probably need to enjoy near-unanimous support among mailers and
    postal employees and have strong support in Congress and at the White
    House. The president's postal commission was created, in part, to help
    build the consensus that we will need to get something done. For the
    most part, I believe they've done an excellent job.
        Like my bill, the commission's report calls for the preservation of
    universal service and the Postal Service's monopoly over the mailbox.
    The commission also recommends, like I do, turning the Postal Service's
    Board of Governors into a stronger, more independent body that would be
    better able to manage a business the size of the Postal Service. Both
    my bill and the commission's report would also give the Postal Service
    significant pricing flexibility and turn the Postal Rate Commission
    into a stronger regulatory body. They would also streamline the Postal
    Service's physical infrastructure and encourage them to adopt new
    technology that would improve productivity and add value to their
    products.
        I am a little concerned, however, with three items addressed in the
    commission's report. First, there is the call for after-the-fact review
    of rates. I fear this could allow potentially damaging rate changes to
    go into effect without being studied properly and without giving the
    public an opportunity to comment. The commission's recommendations
    would allow rates set by the Postal Service to later be adjusted by the
    regulatory body if a third party challenges them. By the time the
    regulators get an opportunity to act, however, mailers could have
    already suffered significant financial damage. To avoid this, I believe
    we should ensure that the regulators are given enough time before rates
    changes go into effect to study them and, if necessary, stop them from
    happening.
        Second, I am also concerned about the way in which the commission's
    recommendations address facility closings. The commission rightly, I
    believe, acknowledges the need for the Postal Service to rationalize
    its network of post offices and processing centers. While I make
    similar recommendations in S. 1285, my bill ensures that the facility
    closing process is part of a larger overall plan to strengthen service
    standards and give Americans better access to postal services than they
    have today.
        While the Postal Service should certainly study the need to close
    some existing facilities, it is important that they do so in an
    orderly, accountable way that promotes public confidence and does not
    in any way hinder their ability to carry out their mandate to serve all
    Americans. If done haphazardly, facility closings could hurt service in
    some communities, especially rural and inner-city areas.
        Finally, there are the recommended changes to collective bargaining
    and employee pay. I won't dwell on the details of those recommendations
    but I will say that we should think carefully before tinkering with a
    system that I believe has worked well for both the Postal Service and
    its union employees. Since the Postal Service's financial difficulties
    worsened, postal unions have agreed to contract renewals with modest,
    reasonable pay increases without going into arbitration. While labor
    does make up a significant percentage of the Postal Service's costs,
    the Postal Service performs labor-intensive work. Reducing employee pay
    and benefits will not change this.
        In closing, I believe it is important to emphasize that postal
    reform should be about preserving and improving the important service
    that the Postal Service provides. As I've said in the past, we should
    give the Postal Service the ability to operate more like a business. We
    should also recognize, however, that the Postal Service is not a
    business. Whatever new flexibility we give the Postal Service to price
    its products or manage its property and workforce, we should ensure
    that their top goal is to continue serving the public.

        Chairman Collins. Thank you. I want to give the other
    Members who arrived after opening statements were done the
    opportunity to make very brief comments if they would like to.
        Senator Pryor, I think you were next.
        Senator Pryor. No, thank you.
        Chairman Collins. Senator Akaka, if you would like to make
    any brief opening statement, feel free to.

                   OPENING STATEMENT OF SENATOR AKAKA

        Senator Akaka. Madam Chairman, I thank you for asking. I
    would like to ask that my opening statement be included in the
    record.
        Chairman Collins. Without objection.
        [The opening prepared statement of Senator Akaka follows:]

                  PREPARED OPENING STATEMENT OF SENATOR AKAKA

        Madam Chairman, thank you for holding this hearing today. Your
    attention underscores this Committee's longstanding dedication to the
    men and women of the U.S. Postal Service and our commitment to all who
    rely on the U.S. Mail.
        It is timely that we focus on the Postal Service during these
    difficult economic times. The Postal Service is a core element of the
    American economic engine. The Postal Service and mail-related
    businesses account for nearly $900 billion in job-producing economic
    activity. Mail generates well over $700 billion in direct sales. The
    value of goods transported by the parcel delivery industry, which
    includes the Postal Service, equals 12 and one third percent of all
    goods transported in the United States.
        Two years ago, the leadership of this Committee asked the Postal
    Service for a comprehensive transformation plan to address short- and
    long-term operational and financial goals. The Postal Service presented
    its Transformation Plan to the Senate at a hearing that I chaired in
    May 2003.
        My concern then, as it was in December when the President appointed
    a commission to review the Postal Service, was how do we ensure the
    continuation of the Postal Service's core mission--universal service--
    at an affordable price.
        I believe the Commission, within a compressed time frame, tackled
    that question. They grappled with the challenges facing the Postal
    Service and made significant recommendations.
        I was especially pleased that the Commission rejected privatizing
    the Postal Service. To those who say a privately-run mail service is
    the only road to financial stability, I am concerned that it would be a
    one-way street to unequal mail service throughout the nation.
        Despite the technological advances that have transformed our lives,
    I believe a government-owned and government-run mail service remains
    key to the nation's economic and social well being. My state of Hawaii
    is dependent on affordable and timely delivery of goods and services,
    many of which come through the U.S. Mail. Mail is particularly
    important for Hawaii's small businesses as means of sustaining old
    customers and nurturing new ones.
        Although no organization, including the Postal Service, should be
    frozen in time, effective reform is dependent on the support of and
    acceptance by its employees. Whether we are transforming the Department
    of Defense or the Postal Service, labor unions and management must work
    together for the transformation to succeed.
        I do not support proposals that would eliminate protections and
    rights currently enjoyed by postal workers. As Federal employees and
    annuitants, postal workers are entitled to certain statutory benefits,
    including access to the Federal Employee Health Benefit program and the
    government's 401(k)-type retirement plan. As a strong advocate of
    employee rights, I will review carefully any proposal to shift postal
    workers and retirees from existing government-wide benefits and
    protections.
        Postal employees have much to lose if the financial, managerial,
    and operational challenges facing the Postal Service are not addressed.
    Yet, not all the problems facing the Postal Service are labor-related.
    The Postal Service's future may be more dependent on how well and how
    effectively it manages its employees, capital assets, purchased
    transportation services, and consumables such as fuel.
        Like other segments of the transportation industry, the Postal
    Service operates within a quickly changing marketplace. Competition is
    fierce, and rapidly changing economic conditions and rising fuel and
    energy costs can affect the Postal Service's ability to remain
    financially viable. The Commission's recommendations that the Postal
    Service have pricing and management flexibility will allow the Postal
    Service to adapt to this rapidly without the need to penalize its
    workers. I thank Mr. Johnson and his fellow commissioners for their
    effort.
        And Madam Chairman, I thank you again for convening this hearing.
    The collection and delivery of mail is a basic and fundamental public
    service. I look forward to hearing from our distinguished witness.

        Chairman Collins. Senator Fitzgerald, if you have any
    opening comments.

                OPENING STATEMENT OF SENATOR FITZGERALD

        Senator Fitzgerald. I would just ask to include my opening
    statement in the record, too, Madam Chairman. Thank you for
    having this hearing, and Mr. Johnson, thank you very much for
    your service. We appreciate it and appreciate the fine
    recommendations of the Commission.
        We will see what we can do. We operate in a political
    world, so we cannot quite be as efficient, I am afraid, as the
    business world, but we can try around here. Thank you very
    much.
        [The prepared statement of Senator Fitzgerald follows:]

                PREPARED OPENING STATEMENT OF SENATOR FITZGERALD

        Good morning. I'm pleased to join my colleagues in welcoming our
    witness today, Mr. James Johnson, co-chair of the President's Postal
    Commission. Mr. Johnson has played an important leadership role in a
    much-needed effort to preserve and modernize one of the nation's vital
    institutions. I also would like to thank Chairman Collins for holding
    this hearing and applaud her leadership over many years on postal
    issues.
        The U.S. Postal Service (USPS) is a unique institution that has
    provided an invaluable service since its inception. The Postal Service
    has over 830,000 employees nationwide, over 43,000 of whom are in my
    home state of Illinois. The Postal Service also operates 2,079 postal
    facilities in my state.
        The Postal Service now faces the challenges of increased
    competition, however, and a regulatory structure that does not meet
    today's needs. As a $67 billion enterprise, the Postal Service is the
    nation's second largest employer and the 11th largest by revenue. The
    services provided by this multi-billion dollar enterprise are being
    displaced through market competition and greater use of electronic
    forms of communication. Relatively new means of communication such as
    email, threaten the financial health and long-term viability of the
    Postal Service. As fewer and fewer people mail letters, postal volume
    is stagnant or shrinking.
        Due to the Postal Service's debt and the decline in its traditional
    revenue sources, the General Accounting Office placed the
    transformational efforts and long-term outlook of the Postal Service on
    its ``high risk'' list in 2001. As the Commission notes in its report,
    even if the Postal Service were not in financial jeopardy, the
    inefficiency of its operations causes billions of dollars in
    unnecessary costs that should be eliminated.
        Strong financial management and good governance have long been
    interests of mine. I believe that good business practices, strong
    financial accounting, and independent oversight are important to the
    overall success of any institution, and these are key areas to address
    in the transformational process at the U.S. Postal Service.
        To transform the Postal Service the Commission has undertaken a
    comprehensive review of the Postal Service's operations. I was
    especially pleased to read the recommendations to use the ``best
    practices'' of the nation's leading businesses to transform the Postal
    Service organization and improve its efficiency. The Commission report
    emphasizes several aspects of current Postal Service operations that
    would not be required of a business. This is important to take note of,
    as these responsibilities are inconsistent with the Postal Service's
    charter as an independently financed federal entity. It is partly due
    to these requirements that the Postal Service is struggling to maintain
    its operations.
        I look forward to hearing from our witness today regarding how
    Congress can help the Postal Service function more like a business and
    less like a bureaucracy. Additionally, I hope to hear about the
    proposed oversight and regulatory structure of the Postal Service, the
    opportunities to enhance financial transparency, and the management of
    its monopoly powers.
        Thank you, Chairman Collins.

        Chairman Collins. Mr. Johnson, we are now going to turn to
    questions, and we will do rounds of 6 minutes each, back and
    forth.
        Your report makes extensive recommendations, both
    administrative and legislative, on a large variety of issues,
    and it really is a comprehensive look at the problems of the
    Postal Service. If Congress were to do nothing--if we failed to
    enact the legislative reforms that you have recommended, or at
    least some of the legislative reforms--how long would the
    Postal Service, as we know it, be able to continue to operate?
    Would it be sustainable in the long term if we just throw up
    our hands and say these issues are too difficult?
        Mr. Johnson. Let me try to answer that as honestly as I
    can. The Postal Service is in dramatically better shape today
    than it was a year ago for two important reasons. The first
    reason is the bill that you and Senator Carper shepherded
    through on the recognition of the overpayment of retirement
    benefits and now the reversing of that overpayment, which is
    giving the Postal Service an opportunity to pay down debt and
    to have other opportunities to do much needed investment.
    Frankly, that has changed the dynamic of urgency to some
    degree.
        The second thing that has changed the dynamic of urgency is
    the skill of the Postmaster General and the leadership of the
    Postal Service. Their Transformation Plan, their efforts to put
    best practices in place, are bearing substantial dividends.
    They are moving forward on a wide variety of fronts, and I
    tried in every one of our nine public meetings to compliment
    them. I do not want to fail to do that today because I think
    excellence in Federal service should be recognized
    systematically, and I think many of the things that they are
    doing are very impressive.
        The short-term, medium-term, next 3-years answer is that
    things are better than they were. In terms of the longer term,
    we focus a great deal of energy on the diversion question, the
    electronic challenge, elements of inefficiency, and the cost
    structure. I have no doubt that in the somewhat longer time
    horizon, every one of the challenges that was apparent a year
    or two ago will be back front and center. As I said earlier, I
    do not think anyone wants this to be taxpayer-subsidized. No
    one wants to boost rates to the point where mailers do not want
    to mail and where they cut their volumes or boost them again
    and again to the point where you have a downward spiral of
    activity and revenue. My belief is that we do not have a long
    time to get it straight and to take our best effort for the
    long term, but it is not a fire. The full consideration by your
    Committee, the full consideration by your companion committee
    on the House side, the full engagement of the President and the
    administration, the further engagement of the Postmaster
    General--this is an ideal time, it seems to me, where we can
    see the sort of contours of a bad future if we do not act, but
    we have time to get it right. As long as we can maintain
    forward momentum for reform, true engagement, and honest
    dialogue, I would be very hopeful. And thanks to the work that
    you all have done, I am more hopeful now than I was a few
    months ago.
        Chairman Collins. You mentioned in your statement the
    recommendation that the Postal Service should stick to its core
    business. Over the past few years, the Postal Service has
    offered a variety of non-postal products and services which
    actually lost money. In addition, I heard from a lot of gift
    shop owners and printers in Maine who are very unhappy about
    having what they saw as unfair subsidized competition from the
    Postal Service.
        There are a couple of examples of failed ventures in the
    non-core area such as Net Post Mailing Online, the on-line
    payment services, which resulted in fiscal year 2002 losses of
    $10.6 million and $1.15 million respectively.
        You have recommended that the Postal Service focus on its
    core business. Could you define that further for us and what
    exactly you mean by that?
        Mr. Johnson. Once again, we spent a lot of time on this
    subject. We were informed by so many corporate disasters of
    people who had done essentially the same thing, that is, gotten
    involved in businesses that they were not prepared to run well
    because they did not have adequate background and expertise. So
    all of us--and this was all nine--had the strong view that
    there should be a restraint on non-postal services and new
    businesses which were not related to the core.
        The way we defined the core business was ``acceptance,
    collection, sorting, transportation and delivery of letters,
    newspapers, magazines, advertising mail and parcels.'' That is
    pretty restrictive, and people came along and asked, isn't it
    true that people get passport photos done in post offices? Are
    you against that? And we said no; that is an incidental public
    service which we think is completely appropriate and not a
    risky business venture.
        What we were really trying to do here was to get at the
    risky business venture concept as opposed to small auxiliary
    services that in some way might be provided.
        I have the feeling once again that the current management
    of the Postal Service understands this point. I do not think
    they like being overly constrained, and they probably find our
    definition a little bit restrictive. But my own view is that
    the Postal Service as it is defined here is huge, and that is
    in fact the public function that is needed. There are many
    private sector providers who can provide a lot of other
    services, and I see no reason to be taking things where there
    are adequate public sector providers and replacing them with
    public sector activities.
        This is a long and complicated discussion in regard to all
    kinds of different government suppliers, whether they be
    defense contractors or communications companies. It is an
    endless discussion about where these boundaries should be.
        Once again, I think our work should be viewed primarily as
    directional, and that is ``No'' on risk business ventures,
    ``Yes'' on core business ventures, where exactly you define
    that. We have given the regulators some power to say that if
    there are things that are challenged to the regulator on the
    basis that this is something that would not be possible without
    cross-subsidy. For example, we have given a lot of latitude for
    the regulator to come in. I know this is a concern of many in
    the mailing community, and that is that things in the end get
    distorted through various kinds of cross-subsidy, and that
    before the Postal Rate Commission, that is an ongoing, huge
    topic.
        We have tried to give a framework without defining it down
    to the last detail, but certainly we come from where you come
    from.
        Chairman Collins. Thank you.
        I am going to call on my colleagues in the order that they
    arrived, and I believe, Senator Dayton, you were next.
        Senator Dayton. Thank you, Madam Chairman.
        Mr. Johnson, if we define the mission of the Postal Service
    as universal service 6 days a week, and if the volume of mail,
    particularly First-Class, is now diminishing, and if that is
    going to be the structural change that is going to persist for
    a while, then, realistically, how does this business model ever
    work other than just to try to compress the revenues, and even
    if you try to get efficiencies, aren't we just trying to extend
    this further and further when it is essentially not a revenue-
    balancing possibility?
        Mr. Johnson. A very interesting question, and once again
    something we spent a lot of time on. We had the feeling that if
    we were guided by best execution throughout, very substantial
    savings could be achieved and therefore, with lower revenues,
    there still could be a break-even result. That was very much on
    our minds.
        We also talked extensively with the Postmaster General
    about standards of service, and one of the concepts that he
    talked about--and he will obviously be before you at some
    point, and he can correct the record if I am wrong--but part of
    the point he made to us was that there were reasonably small
    changes in standard of service which would yield quite large
    economic benefit. All 6-day delivery is not created equal; all
    extensions of service are not created equal--and with more
    flexibility in management, he could find some ways, in his
    opinion, of very modestly, very reasonably, cutting back on
    some of those service standards and getting big dollar results.
        We do not know the future of the internet; we do not know
    the future particularly of the bill payment mechanism. The bill
    presentment and bill payment are really the biggest pieces of
    this whole internet point, and if we could see the future on
    that--and we employed some consultants who took us out 20 years
    and longer in terms of looking at the dynamics of how that
    might work. In my own view--I had a good friend and colleague
    who was at Citigroup for 27 years, I hired him, and when he
    came to work at Fannie Mae, I said, ``Tell me about the
    checkless society,'' and he said, ``I am now in the 30th year
    of a prediction of a checkless society, and every one of those
    30 years, there have been more checks than the year before.''
        I do not know quite how this internet usage, bill payment,
    bill presentment works out over time, and obviously, that is a
    very big piece of this dynamic because in terms of, if you
    will, the profitable business of the post office, a lot of that
    comes in the bill-paying, First-Class dynamic. I think if
    things are simply stable, if you are not getting new
    efficiencies, if you are not getting better execution, if you
    are not riding a little slower curve on some of these matters,
    you can certainly run to the point where you will run out of
    efficiencies and cost control, and you will have service
    requirements which will simply give you an imbalance. We think
    that, if everything is done right, that can be many years from
    now. But if we are sitting here 15 or 20 years from now, you
    could get to a point where the electronic diversion and
    alternative executions were such that you not only had a
    smaller post office, but you had one at that point where you
    did not feel you had additional capacity to raise rates,
    because you were simply diverting into other mechanisms by
    further rate increases, where you had expenses which were
    really down to a minimum, and that you had a mismatch.
        I think we are probably a couple of decades away from
    there, and for government work, that is not bad.
        Senator Dayton. It is as good as it gets.
        You recommend what you call a transformation of the nine-
    member board of governors to what you call a corporate-style,
    12-member board of directors which does not require Senate
    confirmation--and I am sure that was just an omission in the
    report--but how does this corporate-style board of directors
    distinguish itself from this current nine-member board of
    governors. And then--I will make it a two-part question--you
    also set up this three-member Postal Regulatory Board with
    greater authority for accountability and public oversight of
    the Postal Service. What is the interface, then, between this
    Regulatory Board and the board of directors?
        Mr. Johnson. Let me start at the back end of your question.
    The reason that we put the Postal Regulatory Board in place is
    that we believe that there are major public policy implications
    of how the Postal Service goes about its business. We provided
    for Senate confirmation of that Postal Regulatory Board because
    we believe that is the core for setting the boundaries and
    expectations of this activity.
        In terms of the corporate-style board of directors, the
    qualifications which we would like to see in this new board
    would involve people who had run similarly-sized enterprises,
    who had deep experience in logistics businesses, people who had
    been involved with companies with very large work forces. Our
    feeling was that this was primarily a business-like function as
    opposed to a public policy-like function. While it is hard to
    find the exact contours of what is confirmable and what is not
    confirmable, it seemed to us that a reasonable separation
    between the sort of entre here on public policy issues should
    be Senate-confirmed, and that which was more a strictly
    business background kind of best execution did not seem like a
    confirmation item.
        Just a few examples--if you look at Sallie Mae, Fannie Mae,
    Freddie Mac, Federal Home Loan Bank Board, those being business
    functions, none of those is confirmed. There are Presidential
    appointments there which are simply Presidential appointments,
    and they go to work on what is essentially a business financial
    entity with essentially a business financial function for the
    board. Now, in all of those entities, there are some public
    policy dynamics, obviously--whether or not you do the work you
    should be doing for housing and for student loans--so it is not
    pure. But it seemed to us that confirmation should be focused
    on the people who are setting the public policy ground rules,
    and that the people performing business-type functions should
    probably not be infirmed--but once again, you all will decide
    in the end whether that makes any sense or not.
        Senator Dayton. My time has expired.
        Thank you, Madam Chairman. Thank you for your report.
        Chairman Collins. Thank you. Senator Fitzgerald.
        Senator Fitzgerald. Thank you, Madam Chairman.
        Mr. Johnson, I was wondering what your thoughts were with
    respect to rural post office service. One of the big issues I
    have heard about repeatedly in the State of Illinois is that we
    have a lot of smaller Down State communities, and occasionally,
    the Postal Service recommends closing a facility. Of course,
    everybody in the community is up-in-arms, and it often makes it
    difficult for me as a Senator to figure out what to do.
    Obviously, the community does not want to lose its post office,
    but we know at the same time that there are some post offices
    that are not efficient to keep.
        I was wondering if you could explain to the Committee your
    Commission's findings with respect to underutilized facilities
    and what the Postal Service should do with those.
        Mr. Johnson. This was also a much-discussed topic, and let
    me give you our perspective. Our feeling is that any postal
    facility that is required to fulfill the universal service
    obligation should stay open. So, pure and simple, if this is
    part of getting the job done either on the retail side or on
    the distribution side, and if there are not reasonable
    alternatives, it should stay open--that universal service comes
    first.
        Now, if you have a facility where you have three more post
    offices in a very small area there will be circumstances where
    there will be post offices or postal contract services which it
    will be very hard to argue are essential to providing universal
    service either in terms of retail or other postal functions.
        What we have said in that regard is that we do not like the
    sort of yes-or-no dynamic of open or closed. There should be a
    very broad opportunity for the Postal Service to work with the
    community to either add Federal or other functions to that
    facility which would make it more economically viable, to
    cooperate with State and local government in keeping it open.
    For example, they might put a part of city hall or some other
    dimension of public service in that building. We even went so
    far as to say if there was not a market for that postal
    facility, the Postal Service should have the option of giving
    it to the community even if the Postal Service owned it, giving
    it to a nonprofit organization----
        Senator Fitzgerald. Do they have that option now?
        Mr. Johnson. No, I do not believe so. Since I am relatively
    new to all of this, I can be corrected at any time, but I do
    not believe that is an option under current law.
        Our hope was that if there are facilities that really are
    not economic that you do not just have a yes-or-no for the
    community to be a winner or a loser, and that in fact there
    would be multiple ways for the community, even including giving
    them the facility, that they could put it to good use for
    public functions or for public services. We tried to be as
    broadly responsive as we could to the social function that
    small post offices play.
        We have 38,000 post offices today. I think it is safe to
    say that every single ``expert'' we spoke to thought that was
    far more than what was required to get the job done. It is a
    hot potato. But we tried to think through systematically how we
    might make this a little more viable. I do not know whether we
    have succeeded or not.
        Senator Fitzgerald. I am not sure if the Postal Service is
    in any way organized as a corporation.
        Mr. Johnson. It is.
        Senator Fitzgerald. It is a separate corporation, and it
    has a----
        Mr. Johnson. It is a separate, independent governmental
    entity. It is not a Delaware corporation. It is not subject
    to----
        Senator Fitzgerald. But it has a Federal Government charter
    like a Fannie Mae or a Freddie Mac, although it would be quite
    different?
        Mr. Johnson. It has a Federal Government--it is an
    independent agency within the Federal Government.
        Senator Fitzgerald. I see in the book that you put out, you
    have a brief statement of the liabilities of the postal agency,
    but I cannot find in here a statement of the assets of the
    agency. When an agency is not organized as a corporation, it
    gets very hard to figure it out and compare it, say, to the
    other corporations that you attempt to compare it to in terms
    of revenue and in terms of employees.
        I am wondering if it would not make sense to actually
    incorporate it and have it go through some of the disciplines
    that corporations do, even though it would obviously be owned
    or have some special status as a government-chartered
    corporation.
        Mr. Johnson. It is interesting that you should ask that
    question. We talked about that, and we to some extent had the
    advice of outside experts on that point. The conclusion that we
    came to is that by something that looked more like a
    traditional chartering, we would pick up problems of various
    kinds, including the capacity to be sued for various things and
    other things that are not currently a problem for the Postal
    Service.
        We tried to get at the financial transparency issues in
    other ways, through the SEC filings that we recommend and so
    on. Dick Strasser, the chief financial officer of the Postal
    Service, happens to be sitting right behind me this morning,
    and I am sure he can shed substantially greater light at the
    appropriate time on how to think about the assets.
        Senator Fitzgerald. I just noticed that in your report, in
    order to come up with some of these viabilities, you are
    deriving some of them from, like, a letter that the CBO wrote
    to Jim Nussle. It does not look like they are written down or
    accounted for in certain places.
        Let me ask you one final question. I know my time is up.
        Chairman Collins. I am going to try to hold to the time, so
    if you could wrap up; thank you.
        Senator Fitzgerald. Just a final question. Were there other
    liabilities besides this military pension liability that
    somehow was foisted onto the Postal Service that
    administrations over the years have tried to hide or bury in
    the Postal Service?
        Mr. Johnson. There are major liability areas, but I am not
    aware of those being suddenly or externally introduced.
        Senator Fitzgerald. Thank you.
        Chairman Collins. Senator Durbin.
        Senator Durbin. Thank you, Madam Chairman, and thank you,
    Mr. Johnson and all those who took part in this postal reform
    effort.
        I think there are two elements that are essential if this
    is going to be successful. The first is selling postal reform
    proposals to Congress and the White House, and second is
    selling it to the men and women of the Postal Service so that
    it finally is implemented in a successful fashion.
        I read portions of your report with great interest, and let
    me point out one that you noted in your statement. ``The Postal
    Service employs approximately 843,000 people, making it the
    second-largest work force in the United States. Its jobs are
    highly-coveted. As of July 2001, the Postal Service had a
    backlog of some 400,000 job applicants and virtually no
    turnover.''
        Then I turn to another section, and I read that ``In 2002,
    184,329 grievances were filed by members of the Postal Service
    before the major union reached a second-step appeal; and
    106,834 were pending arbitration.''
        ``Clearly, something is wrong when a unionized work force
    of 746,000 employees generates more than 184,000 second-step
    grievances in 1 year. By comparison with a work force of
    102,000 employees, American Airlines launched a major
    alternative dispute resolution initiative when its backlog of
    employee complaints reached a mere 800.''
        I want to try to explore this for a moment with you. Those
    seem to be two very contradictory statements. The most coveted
    job to the point where 400,000 people are waiting to get an
    opportunity to work there, and of the people who are there,
    grievances are being filed on behalf of about one out of four
    employees every year. It suggests to me that there is a lure to
    the job but a dissatisfaction once they have arrived with
    management and the relationship between labor and management.
        Do you feel that we need to look at this more seriously at
    the outset before we can hope to implement successfully any
    postal reform where a commission or the management is going to
    suggest to a work force which apparently has its differences
    with the management has any chance of success?
        Mr. Johnson. Yes is the answer to your question. I believe
    that the grievances are far too high. Now, there are some
    alternative dispute mechanisms which I think should be more
    broadly applied. The letter carriers have made some very
    substantial progress on some experimental programs that they
    have to reduce grievances and deal with them more
    expeditiously.
        It was absolutely clear to the Commission that this gave
    every evidence of an inadequate level of trust between labor
    and management, that the grievances were unbelievably high, and
    that it was something that had to be very seriously addressed.
    I must say, just to give you a little editorial comment, there
    was no feeling that this was primarily a labor problem. There
    was a feeling that this is an indication of a very substantial
    shortfall on management's part as well as an indication of a
    strong willingness to confront the terms of the contract and
    that, for everybody's better interest, there should be a better
    way.
        Senator Durbin. So how will this management team, which is
    having substantial difficulty with the current law, regulation,
    and procedure of the U.S. Postal Service, lead this team into
    the era of reform, suggesting some substantial and sometimes
    painful changes in the workplace? How can this same management
    team which apparently has such a contentious relationship be
    expected to be successful?
        Mr. Johnson. A good question once again, and this is also a
    subjective reply. Having spent dozens and dozens of hours now
    with the management team--I must say, dozens of hours as well
    with the labor leaders who represent the major employee units--
    my feeling is that Jack Potter and the other people on his team
    have a lot better orientation and attitude than they do record.
    That gives me some hope. It does not make me foolishly
    optimistic, but I think we have a great deal of work here to do
    on everybody's part. I think you are absolutely right to be
    focused on this. The grievances are dramatically too high.
    There needs to be an earlier resolution, a quicker resolution.
    And in terms of whether or not this management can provide that
    leadership, I see every evidence that they can, but the record
    at this point is nothing to be proud of.
        Senator Durbin. I do not have enough time to get into this
    next area, but I would like you to consider and perhaps get
    back to me informally or formally--if we are looking for a
    different work force for the Postal Service in the 21st
    Century, in the next 15 or 20 years, to respond to technology
    and challenges to the Postal Service, how can you reconcile the
    need for this type of new Federal employee in the work force
    with your suggestions of compromising or reducing health and
    retirement benefits for new hires?
        It strikes me that United Airlines and others have learned
    in the midst of bankruptcy that you just have to be careful
    that you do not compromise your ability to retain and attract
    the very best personnel because somebody out there is going to
    offer them a better arrangements.
        Mr. Johnson. I think it is an area of great concern. In
    every company that I am involved in, we are constantly
    preoccupied with whether or not our best people are going to be
    stolen.
        In the Washington area, when I was CEO of Fannie Mae in the
    1990's, there was a war underway between IBM, Marriott, Fannie
    Mae, and a few other companies for the best talent in the
    technology area. What you raise is a very real point. That is
    part of the reason why we made another controversial
    recommendation, and that is that we should not have the same
    ceiling we have today on total compensation. The Postmaster
    General and other key leaders should have more flexibility, or
    the board should have more flexibility, in terms of paying them
    competitive market rates.
        I think the Congress has kind of a fundamental choice here.
    What we were dealing with was what we viewed as a black-letter
    law on comparability. We tried to add things to the collective
    bargaining dynamic within the context of our reading of that
    law.
        Now, if this is going to be even more nimble in the future
    to the Postal Service overall, maybe the Congress needs to look
    at some provisions for flexibility. We were dealing with the
    fact that we had witness after witness after witness who said
    it is not comparable; people in the Postal Service are being
    paid more. We never bought into that. We said we hear what you
    are saying, but we do not have the capacity to determine
    whether or not it is comparable.
        What we recommended was a mechanism to work on this
    comparability issue through the Postal Regulatory Board.
        From my point of view, if I were running a comparable
    company, as I was at Fannie Mae, a comparably large company,
    without flexibility in terms of attracting and retaining my
    most valuable employees, I would have been unreasonably
    hamstrung, and we could never have been the company we were if
    we were hamstrung in that way.
        But we viewed it essentially as a precondition of our work,
    the very clear statement in the early 1970's statute saying
    that comparability was the law of the land. If that should not
    be the way it is looked at, then Congress should address that.
        Senator Durbin. Thank you. Thank you, Madam Chairman.
        Chairman Collins. Senator Pryor.

                   OPENING STATEMENT OF SENATOR PRYOR

        Senator Pryor. Thank you, Madam Chairman.
        I would like to ask you about some trends at the post
    office and the Postal Service generally in this country--and I
    may be mistaken, but as I understand it, there has been a drop
    in First-Class mail, and some people think that possibly email,
    the internet, etc., maybe the economy have something to do with
    that, and as I understand it, your parcel business remains
    strong.
        So I would just like to hear the trends that you see at the
    post office and what we are dealing with here and where you
    think we are going.
        Mr. Johnson. Thank you, Senator.
        The short answer is we do not know where we are going, and
    that is what makes many of us feel so uncertain. We have had
    this economic downturn, and we now have a consensus of
    economists saying it is over and that third-quarter growth will
    be 5 percent or thereabouts, that we are on our way to a
    substantial recovery.
        We have had this interaction between the rise of the
    internet, the rise of the internet bill-paying dynamic which I
    was talking about just a minute ago, and the downturn in the
    economy. Typically in the past, if the economy is growing, mail
    volumes have grown. So if you look now at the next 12 months--
    and I do not know how fast you will be dealing with this
    legislation or possible legislation--but we are going to learn
    a lot in the next 12 months in terms of disentangling the
    electronics from the economy. If we do in fact have the
    recovery which most economists now predict, and we do not see
    volume growth, and we have more and more incentives being
    provided--and this is a very big reality--where credit card
    companies, public utilities and others are incenting----
        Senator Pryor. Your mass mailers.
        Mr. Johnson. Well, no, this is even a little different than
    the mass mailing thing--in many cases, they have very large
    numbers that they are mailing--but if you are paying a bill to
    a telephone company today or to a public utility or to American
    Express, with the cost savings that flow from your being an
    internet bill-payer, they are prepared to give you a gift
    certificate of $100 or $200 or a variety of other incentives to
    move you from somebody who uses the U.S. mails to somebody who
    does not. This is a very big commercial reality.
        We also do not know at this point--to use an economist's
    term--where the indifference points are in the American
    consumer's mind. There are lots of people who still say . . .
    One of the most significant credit card companies came to see
    me not long after I had been named co-chair of this Commission.
    They said that now, up to 32 percent of their bills were being
    paid on line, and they were getting nowhere on people being
    willing to receive their bills on line. Then they went through
    the economics of how much money they would save if they could
    get them to receive their bills on line, and it became clear
    that they could give hundreds of dollars to each person with a
    reasonable perspective about how long that account was going to
    last, and still be better-off if they could convert them to an
    on line customer.
        We have a lot of unknowns, a lot of variables, a lot of
    question marks. My expectation is at least to answer the
    primary question mark and that is, what is the effect of slow
    economic growth versus robust economic growth? I hope we have a
    chance to observe in the next year.
        Senator Pryor. I do, too. You may not know where we are
    going in the future, but what about right now? What are the
    trends right now? Are all of your lines of service lines that
    they have been in the past?
        Mr. Johnson. No. The real point here is First-Class mail.
        Senator Pryor. First-Class mail.
        Mr. Johnson. Yes. There are many other dimensions here that
    are growing or staying relatively flat, and the First-Class
    mail, of course, is where the highest postal rates are, where
    the support for the overhead of the institution flows from, and
    that is really where the focal point should be in terms of the
    threat to the basic balance of revenues and costs.
        Senator Pryor. If you do not know where you are going--and
    it is hard to know with all the variables out there, and like
    you said, we will know a lot in the next 12 months--should we,
    the Congress, go into sort of a holding pattern for the next 12
    months and let you sort this out before we restructure and
    transform and change things at the Postal Service?
        Mr. Johnson. Well, over the next 12 months, I am not going
    to be sorting out much of anything having to do with the mail.
    I think that there are many areas in our recommendations which
    have an orientation to best practice, best execution, better
    organization, better functioning, growth, marketing,
    cooperation with the private sector, where nothing needs to
    wait, where a reform agenda could be pursued starting today.
        I think there are other dimensions where the size of the
    challenge may evolve, but we tried to look at a very broad
    range of possible futures, and even within that broad range of
    possible futures, we came to the view that this was the right
    structure. Starting with universal service, structured as it is
    today, with the balance of revenues and costs, that we could
    achieve in a couple of decades in all likelihood, unless there
    were some radical change, of stability in this model.
        Therefore, you may get more or less political support. For
    example, on the question of whether or not the Postal Service
    should have to pick up this $25 to $30 billion of armed
    services pension obligation, because if you get a mismatch
    sooner rather than later, it may be even more apparent that it
    is a burden that should not be put on the Postal Service
    because it will rock the ship. But in my view over the long
    term, much of the reform agenda, not just from our work but
    from the work of people on this Committee, the Chairman most
    notably, work in the House, much of this agenda of change,
    flexibility, transparency, is an agenda that is ready to go. So
    I would certainly not be in the camp of saying wait if you do
    not have to.
        Senator Pryor. Thank you. Thank you, Madam Chairman.
        Chairman Collins. Senator Carper.
        Senator Carper. Thanks, Madam Chairman.
        I think I said this before, but I want to say it again to
    you and to Harry Pearce and the others who served on this
    Commission--and I know you have day jobs as well--but thank you
    very much for finding the time in your lives to invest as
    heavily as you have. And you have a very small staff. I do not
    know if any of them are with you here today--one or two of them
    look like I have seen them before.
        Mr. Johnson. Yes.
        Senator Carper. I just want to express to them and others
    who work with them our thanks; for a relatively few people,
    they did a lot, and I think they have done a good job.
        I mentioned earlier that I spent some time in the Navy back
    in the sixties and seventies on active duty, and for a long
    time after that, actually, in the reserves. I remember being in
    the military a long time ago, and people used to talk about
    government work. They would do a job, not very well, and they
    would say: ``That is good enough for Government work.'' You
    have probably heard that before. I never liked that, and people
    learned never to say that around me.
        When you are doing government's work, you are doing the
    people's work, and I think that demands our very best effort.
        Later, I was elected to State Treasurer, and at about the
    same time, Jimmy Carter was elected President, and he had a guy
    named Bert Lance, who used to work for me, as his budget
    director for a while. Bert Lance used to like to say, ``If it
    ain't broke, don't fix it.'' I do not know if it originated
    with him, but he was the first person I ever heard say that. I
    used to say that myself. I stopped saying that, though.
        And eventually, when I was Governor of Delaware, we would
    never say, ``If it ain't broke, don't fix it''--we would say,
    ``If it isn't perfect, make it better.'' And I think we will
    all agree that our Postal Service is not perfect, and it can be
    made better.
        I wish we had a futurist here. I am glad that you are here,
    and I am delighted that you served on this panel. But I wish we
    had a futurist here who could talk--and this is sort of
    following up on Senator Pryor's question--and tell us what is
    the future, what is the Postal Service going to look like 10
    years from now, 20 years from now, 30 years from now. Back when
    Ted Stevens was a young Senator, I do not know if they had a
    vision of what the Postal Service was going to look like in 30
    or 32 years.
        We were talking here about email and trying to get people
    to use electronic checking and that kind of thing. We do a
    biweekly mail report in my office--I always say that the things
    you measure are the things you do best--to actually measure how
    we are doing on the mail, how many letters we receive on what
    subjects, how long our turnaround time is. I hold everybody on
    my staff accountable, including myself.
        It is interesting that when we did our mail report for this
    week and the last few weeks--do you know what we learned--we
    learned I think for the first time that if you look at the
    folks who are emailing us versus the folks who are writing us
    versus the folks who are calling us by phone, we now get more
    communications by email than either of the other two put
    together. That was not the case even 2\1/2\ years ago when I
    came here, so obviously, things are changing.
        But take just a moment, and realizing that none of us has
    the ability to see the future clearly, but what do you think 10
    or 20 years from now our Postal Service should look like, just
    in general terms?
        Mr. Johnson. The first thing that I would say is that many
    American corporations have found dimensions of productivity
    increase far beyond what they ever imagined. If you read the
    Six Sigma literature coming from General Electric, a lot of
    operational efficiency literature, if you look at the
    integration of networks, if you look at the imaging now that is
    routine in major American companies, and if you now look at
    Alan Greenspan's discussion on an ongoing basis of productivity
    increases, I think we are going to see--and I have great
    respect for public functions as well--I think we are going to
    see a postal system which is dramatically streamlined from what
    it is today. I find that very encouraging because all
    dimensions of being able to do more and better for less need to
    be pursued in the public sector, or you develop the kind of
    cynicism that you are talking about, about how it is not the
    best way to do things.
        I keep getting reminded of the Social Security
    Administration and some other dimensions of government who
    constantly are winning awards for the lowest cost, the best
    execution, doing things better than the private sector in many
    of their functions. I do not necessarily see it as more
    private. A number of my colleagues on the Commission do, and I
    think that should be an ongoing dialogue about what is private
    and what is public.
        But I would be thrilled if we were able to take all of
    those dimensions of logistical, technology, and imaging
    investment and organize those in the context of being a
    government entity and staffed by people who are staffing it
    today.
        I think this will make it better integrated, much more
    efficient from a process and logistics point of view, and I
    would guess even within the context of the narrow function that
    we describe, finding lots of new businesses as they go along. I
    think people want to be connected, and I think they want to be
    connected in tangible physical ways. And yes, you can print an
    email, and yes, you can take things off your screen, and maybe
    I am just so old that I have not gotten it yet, but when
    somebody sends me a thank you note, if it comes on email, I say
    fine, and it goes into my wastebasket reasonably quickly. But
    if somebody takes the time to write me, with some thought, and
    I have it tangibly in front of me, it makes a big difference to
    me. Now, as I said, maybe that is generational.
        Likewise, I happen to be somebody who still works from pink
    slips on my telephone messages, because until I throw away the
    pink slip, it is still in front of me, and I cannot ignore it
    on a list, and I cannot ignore it on a memo. I have the slip,
    and I know that if I have not thrown it away myself, I have not
    dealt with the issue.
        I think there is a tactile, touching, feeling dimension to
    a lot of us that some of the discussion about how we are all
    going to become email people and computer screen people and
    video-cellphone people ignores--yes, we probably will. But as I
    move around and try to get my work done, I have all those
    tangible assets. In the end, if it is important, if it is
    personal, if it is complicated, I really like to see it and
    feel it and touch it, so I tend to be a little bit on the kind
    of slow revolution side. I am a little bit on the side of the
    person who is not surprised that there are more checks every
    year. But I would not bet on it. I would not bet a lot of money
    that that is the way it is going to roll out. But I think
    Americans have shown a lot of flexibility--and this goes back
    to Senator Fitzgerald's question. I come from rural America--I
    grew up in a town of 3,000 people; my father was the acting
    postmaster in our town of 3,000 people--and I know a little bit
    about that rural dynamic. But they are changing, too, and I
    think as long as you have a service orientation from top to
    bottom in the Postal Service, we will probably be doing a lot
    of things in different ways.
        Now, if you do not have a service orientation, and you do
    not have a public mission orientation, you are going to leave
    people behind, and you are going to make bad decisions; but if
    you have the best of technology and that sort of public
    service, service orientation, this could look very different,
    but I think it could be even more of an asset for our country
    than it is today.
        Senator Carper. Madam Chairman, my time has expired. If I
    could just conclude, not with a question but with a comment--
    there is a whole range of issues that I wish we had time to
    explore. I do not know if any of my colleagues have had a
    chance to visit a new post office in their States in recent
    months or weeks. I was down in Seaford, Delaware during the
    August recess. If you go to the beaches in Delaware--Rehobeth
    or Dewey or Bethany or any of those places--from Washington,
    you pass very close to Seaford, Delaware, which is where the
    first nylon plant in the world was built by the DuPont Company
    about 50 years ago.
        They recently sold off their post office which was right in
    downtown Seaford, and it is now a museum. It is really exciting
    what they have done with it. But they built a new post office
    not far from there, and it is a post office that is really more
    attuned to the 21st Century in their ability to process mail,
    but also in their ability to act as a retail operation and be
    customer-friendly and so forth.
        So I would just invite my colleagues, if you have a chance
    when you are out, touring around your State, to take a look at
    what the Postal Service is doing to give us a little bit of a
    window into the future, which I think would suggest that maybe
    the best days of the Postal Service are not entirely behind us.
        Thank you, Madam Chairman.
        Chairman Collins. Thank you, Senator. Senator Akaka.
        Senator Akaka. Thank you very much, Madam Chairman.
        Mr. Johnson, about 2 years ago, this Committee asked the
    Postal Service for a comprehensive transformation plan, which
    would address the short- and long-term operational and
    financial goals of the Postal Service, including providing
    universal service at an affordable price.
        I should tell you that I believe the Commission, within a
    compressed time frame, tackled that question. You grappled with
    the challenges facing the Postal Service and made significant
    recommendations.
        You touched on the Commission's recommendation that would
    task the Postal Regulatory Board with the responsibility of
    determining pay and benefit comparability. The Commission also
    recommends clarifying the term ``comparability'' by redefining
    current laws and applying any clarification prospectively. Were
    there other alternatives discussed on the comparability issue,
    and were there concerns that two different pay and benefit
    systems could have a chilling effect on employee morale?
        Mr. Johnson. Yes, there were. There were very substantial
    discussions of both of those concerns, and we could not think
    of a better way to proceed than what we recommended.
        As I said earlier, comparability is the law of the land.
    Partial comparability we did not believe was congressional
    intent. We believed that it was all compensation. This can
    always be reinterpreted by the Congress, but we felt that it
    meant all compensation.
        We were highly sensitive about doing anything that would
    seem to abrogate existing arrangements, existing contracts,
    existing retirees, so we thought the only possible entry point
    was for new employees. We also felt that if you did not
    honestly address it--and I am not prejudging the comparability
    issue; friends of mine in the labor movement have said to me,
    convincingly or very strongly, that if you look at the correct,
    honest comparability measures, you will not find a premium, and
    obviously, that is the kind of data that the regulator would be
    legally required to very carefully evaluate.
        We did not think that this was a fabulous, easy, non-
    disruptive way of thinking about it, because just as we
    considered everything else, entering with new employees
    comprehensively seemed to us to be the best alternative. So
    that is where we ended up.
        Senator Akaka. Thank you for your response, Mr. Johnson.
        You mentioned transparency. The lack of financial
    transparency within the Postal Service has long troubled me, so
    I was interested in the Commission's recommendation that the
    Postal Service voluntarily comply with the Securities and
    Exchange Commission's reporting standards. My question to you
    is why should this be voluntary, and what incentive would there
    be for the Postal Service to comply?
        Mr. Johnson. I think the incentive to comply would be to
    end a long simmering discussion. As you said, you have had a
    long concern about whether or not they were reporting
    adequately, comprehensively, to a standard that should be
    expected of such a large, complex financial enterprise.
        The SEC standard is America's standard today; it is the
    gold standard in terms of transparency for large financial
    enterprises, so therefore, it kind of ends the issue.
        Ultimately, there might be a way of making it a little less
    voluntary. On the other hand, these are very complex issues--
    and I happen to know that my former company, Fannie Mae, has
    committed to meeting all of the SEC standards in all of their
    reporting. It took them 9 months of very detailed negotiations
    for a company that reports a lot more like a standard company
    than the Postal Service does to get all the agreements and
    standards and arrangements all in place, and it was a very
    complicated effort.
        It did not seem to us to be an easy thing to mandate given
    that level of complexity. Now, maybe we should have been more
    aggressive in terms of saying that over a transition period of
    a couple of years or some reasonable period of time, the SEC
    should be asked to declare that they are in compliance. That
    could be a somewhat more aggressive approach, and if the
    Committee likes this idea at all, maybe the Committee should
    move in that direction. We were just a little lighter, even
    though we all thought it was a good standard.
        Senator Akaka. Madam Chairman, my time has expired. May I
    ask a follow-up to that?
        Chairman Collins. Certainly.
        Senator Akaka. You recommend, Mr. Johnson, that the Postal
    Regulatory Board develop reporting requirements and impose
    sanctions to enforce its reporting requirements. What sanctions
    are envisioned by the Commission?
        Mr. Johnson. Well, there is a sanction that would involve
    simply requiring the Postal Service to stop a function. For
    example, if they thought that there was cross-subsidy involved,
    they would have the authority to say there is cross-subsidy and
    you may not do this any further. If they found a rate-setting
    noncompliance, they could force compliance with the rate-
    setting standards which the Regulatory Board had put in place.
        We contemplated the Postal Regulatory Board having subpoena
    power so that if there was a shortfall of information or a
    shortfall of candor, the Regulatory Board would have the legal
    capacity to subpoena records, to subpoena testimony.
        I think we have given this regulator some teeth, some would
    argue too many teeth, and it ultimately, obviously, has to be
    shaped by this Committee. But our idea was that on the areas
    where they were supposed to assume responsibility, they had a
    lot of authority.
        Senator Akaka. Thank you very much for your responses, Mr.
    Johnson. Thank you, Madam Chairman.
        Chairman Collins. Thank you, Senator.
        Mr. Johnson, I have so many more questions I want to ask
    you, but in view of the hour, I am only going to ask you a few
    of them.
        First, all of us are sensitive to making sure that the
    postal work force is fairly compensated, well-treated, and that
    morale is high, and that is why there is sensitivity, I think,
    to some of the recommendations that were made. But to help give
    us a better understanding, I want to ask you just a few
    questions in that area.
        I believe you said that 76 percent of the overall expenses
    of the Postal Service are personnel. I realize the Postal
    Service is truly unique and that it is not comparable to
    Federal Express or United Parcel Service in its mission, but do
    you have any idea what the comparable percentage of personal
    cost is for FedEx or UPS?
        Mr. Johnson. The answer is I do not have enough of an idea
    to give you an answer. It is quite dramatically less. But
    Dennis Shea, who is still working with the Commission for a
    couple more weeks, and I will get back to you.
        Chairman Collins. Thank you. That would be helpful.
        Second, it is my understanding from your report that a
    substantial number of postal employees will be eligible for
    retirement within the next 7 years, and I think if there is
    going to be a need for downsizing, all of us would hope that we
    could do this through retirements or other natural attrition
    rather than making the very painful choice of laying people
    off. Could you give us some idea of how many postal employees
    will be eligible for retirement by the year 2010?
        Mr. Johnson. The number that we used in the report which we
    got from the Postal Service was 47 percent between now and
    2010. I assume that is a generally accurate number.
        We also had an interesting session one night with the
    Postmaster General--and I would urge you to explore these
    topics with him as well. We discussed that there are quite a
    large number of temporary employees in the Postal Service,
    there are quite a large number of special arrangements of
    different kinds within the Postal Service, and if you are
    thinking about the counted employees in that 835,000, if that
    is the correct number for today, and the 47 percent, there is
    also a lot of latitude in terms of building greater
    efficiencies and lowering costs that can be pursued outside of
    that core of professional employees.
        We were convinced that with the scale of attrition, there
    would be very substantial latitude in terms of having a smaller
    work force without doing the kinds of things that you and the
    other Members of the Committee I am sure would not want to be
    doing.
        Chairman Collins. I have great respect for the fine men and
    women who serve for the Postal Service--I know you do as well--
    --
        Mr. Johnson. So do we.
        Chairman Collins. [continuing] And we will certainly work
    closely with them and with the Postal Service and with the
    Commission as we pursue these recommendations.
        The pay-for-performance issue is one that interests me
    because I have been involved in a lot of the civil service
    reform issues, and I know it was unanimously agreed on by the
    Commission. It is a principle that I support.
        Would you agree that if you go to a pay-for-performance
    system, however, it is absolutely key that you have a lot of
    training in how it should be used to ensure that there is a
    fair system in place with standards for employee appraisal and
    involvement of the employees in coming up with the system?
        Mr. Johnson. I would certainly strongly agree. We tried to
    make that very clear in the report. We also had some data that
    was provided for us by Watson Wyatt, the human resources
    consulting firm. They do an employer bargaining objectives
    survey each year of establishments with collective bargaining
    agreements. Let me just give you a couple of numbers. They
    found a prevalence of incentive and variable pay plans--these
    are in unionized work forces. They found that 16 percent of
    employers utilize group incentive plans, 10 percent utilize
    gain-sharing plans, 9 percent utilize individual incentive
    plans, and 7 percent utilize profit-sharing plans. The survey
    also found that these percentages are approximately 50 percent
    higher for manufacturing and processing concerns.
        We also went back to Watson Wyatt just in the last few days
    and said there has been a lot of skepticism about whether or
    not these incentive arrangements work in unionized work forces,
    whether they can be done on a fair basis, and asked them for
    some examples of companies that had these kinds of pay-for-
    performance incentive plans in place. Dennis can provide you
    with a list of companies where they are in place if there is a
    desire on your part or your staff's to see whether there are
    some of these that, in fact, are following the guidelines that
    we talked about, that you just talked about, and are working
    out well.
        Chairman Collins. That would be very helpful.
        Mr. Johnson. We do not expect anybody to accept anything on
    faith. Obviously, the Committee would want to examine very
    carefully places where this is being tried and see whether or
    not it meets the Committee standards in terms of its
    effectiveness.
        [The information follows.]

              Incentive Plans For Collectively Bargained Employees

            As a follow-up to the September 17th hearing, I wanted to let
            you know that Commission consultant Watson Wyatt has informed
            me that they believe the following companies have incentive
            plans for their represented employees:
                Boeing
                United Parcel Service
                Ford Motor Co.
                Delphi Corp.
                DaimierChrysler
                Nucor Corporation

        Chairman Collins. The Commission noted in its report that
    the Postal Service has excess capacity in its mail processing
    function. I remember being struck by the fact that the
    Brentwood facility could be closed for I think it was 18 months
    in the wake of the anthrax contamination and yet did not seem
    to have a notable impact on this area's ability to process and
    receive mail.
        Did the Commission look at that example and others in
    reaching its determination, and did you come up with any
    percentage, or did you attempt to quantify the excess capacity?
        Mr. Johnson. The answer unfortunately is no and no. We did
    not look at Brentwood in any real detail. We did not attempt to
    quantify with any precision. We asked a lot of people what
    their view was of how much excess capacity and inefficiency
    there was in the current system of processing and distribution.
    And we had a lot of general characterizations saying ``a lot'',
    ``a tremendous amount'', ``a lot of work can be done'', ``many,
    many facilities can be closed.'' We pressed the Postmaster
    General one night on how many he thought could be done over a
    3-year period--it was an off-the-record discussion so I will
    not give you his answer, but it was not a trivial number.
        So once again, our work here was really directional. We ask
    the post office to come in with its very best judgment about
    how it can have the most efficient, optimum network, and then
    deal with it--take it to the President, bring it to this
    Committee and the comparable committee in the House, and vote
    it up or down.
        The feeling on the Commission after having visited a lot of
    different facilities, but by no means being experts, was that
    there was a large number of facilities that were duplicative.
        Chairman Collins. Finally, I realize that the Commission's
    report has to be considered as a whole, but are there any
    particular recommendations that you think are absolutely
    imperative and want to highlight for the Committee today--you
    presented an overview, but if you were prioritizing the
    recommendations.
        Mr. Johnson. Perhaps the next time we talk.
        Chairman Collins. OK.
        Mr. Johnson. I would be happy to try to think that through
    in the right way.
        Chairman Collins. That would be fine.
        Mr. Johnson. Thank you.
        Chairman Collins. Again, I want to thank you very much for
    your hard work and for appearing before us today at our initial
    hearing to look at the Commission's report.
        I promise to send you a handwritten thank you note through
    the United States mail. You will not get a curt email thank you
    from me. It will have a 37-cent stamp on it--I will not even
    frank it. [Laughter.]
        Today's hearing is the first in a series. Our next hearing,
    which will probably be in early November, but we will announce
    the time shortly, will feature the Postal Service and the
    General Accounting Office.
        We also look forward to continuing these hearings next year
    and hearing from those more directly affected--the postal union
    representatives, the mailing community representatives. We want
    to get a wide variety of views, and we will indeed be
    soliciting those opinions even after we have adjourned for this
    session.
        I want to thank you, Mr. Johnson, for being our lead-off
    witness. You did a superb job in presenting the Commission's
    report, and I want to join all of my colleagues in thanking not
    only you, but Mr. Pearce and all the members of the Commission
    and its staff for your diligent work. I really think you did a
    superb job.
        Probably no one will agree with every single recommendation
    that you have made, but all of us are grateful for the very
    thorough look and examination that you did. I think it is a
    well-balanced, well-done report, and I salute you for it.
        We are going to keep the record open for 15 days following
    this hearing for the submission of additional statements and
    questions.
        I want to thank everybody for being here today. I think the
    attendance shows that there are many people who recognize how
    critical this report is to ensuring the future viability of the
    Postal Service, an organization, an institution, that has
    served our country so well for more than 200 years.
        This hearing is now adjourned.
        [Whereupon, at 12:01 p.m., the Committee was adjourned.]

                                A P P E N D I X

                                  ----------

                 PREPARED OPENING STATEMENT OF SENATOR COLEMAN

        Thank you Chairman Collins for holding this hearing. I know of your
    long involvement in this issue and look forward to helping you craft
    legislation to help the Postal Service prepare for the future.
        I think there is broad agreement on the challenges faced by the
    Postal Service. Every year the addition of 1.7 new addresses increases
    its operating costs. At the same time, competitive and technological
    changes have reduced both its volume and operating margins. E-mail and
    e-banking will continue to pose a growing challenge to First Class
    mail. While it is true that e-commerce is likely to increase the number
    of packages going to consumers, the Postal Service already faces strong
    competition in these markets.
        The Commission's report details all of this. It also details over
    $90 billion in unfunded future liabilities facing the Postal Service.
    By far the largest part of these liabilities is the health care costs
    promised to current future retirees. Unfortunately, the report does not
    detail how the Postal Service will generate sufficient revenues to pay
    these liabilities. There is a real danger that significantly raising
    postal rates will only increase the competitive threat.
        In the last decade the nation's leading private companies have
    implemented revolutionary changes in their logistics operations. Common
    changes include a significant reduction in the number of warehouses,
    automation, outsourcing of major activities, installation of inventory
    management systems often at enormous cost and difficulty, and better
    metrics. The Postal Service has begun to implement some of these
    changes but institutional resistance and statutory restrictions have
    slowed its progress. If the Postal Service were to undergo a revolution
    equivalent to that in the private sector, I believe it would look like
    a much different organization.
        The question is how do we get from here to there. I believe that if
    we act soon, we can ensure that changes are well thought out and we can
    find the resources to be fair to all the stakeholders. Given the
    challenges facing the Post Office, all parties are going to have to
    accept some portion of the costs of transformation. But I hope that we
    can still meet the priorities of each group. In contrast, significant
    delay only increases that chance that reforms will be imposed upon us
    in an atmosphere of panic at a time when we lack the ability to ensure
    fairness. Like the steel industry a couple of decades ago, the need for
    change is clear. Now we need the will to address these challenges in an
    honest and fair manner.

                PREPARED OPENING STATEMENT OF SENATOR LIEBERMAN

        Thank you, Madam Chairman, for convening this hearing on the
    recommendations of the President's Commission on the U.S. Postal
    Service. The Commission was established in December 2002 and was
    charged with identifying the severe financial and managerial challenges
    facing the Postal Service, examining potential solutions, and
    recommending legislative and administrative steps to ensure the long-
    term viability of the Postal Service.
        On July 31, the Commission issued its report, which contains 35
    recommendations to reform the Postal Service on a wide range of topics.
    I commend the Commissioners for their efforts to understand and analyze
    the many challenges the Postal Service faces, and I believe they have
    made a number of valuable recommendations. For example, I have long
    been an advocate for greater financial disclosure by the Postal
    Service, to provide the American people a full accounting of its fiscal
    health, and I am pleased that the Commission has also seen the need for
    such increased financial transparency.
        But before I say more about this and other recommendations that I
    support, I must first express my profound disappointment about parts of
    the Commission's report that seem based on the mistaken belief that the
    problems of Postal Service can be solved by capping and cutting the pay
    and benefits of its workers. It is hard to think of any institution
    with a greater impact on virtually every American than the Postal
    Service, and its effective functioning depends on the continued loyal
    service and hard work of its employees. I believe that Commission
    recommendations which would undermine collective bargaining, threaten
    employees' economic security, and add to morale problems in the
    workplace, are misconceived and counterproductive. Such suggestions
    send the wrong message at the wrong time to postal workers: just when
    their good will and hard work are most needed to improve the Postal
    Service's status, these proposals convey the message that postal
    workers are part of the problem instead of the solution.
        For example, although wages at the Postal Service are now
    established by negotiation between management and employee
    representatives under a system of collective-bargaining, the Commission
    proposes to empower a new presidentially-appointed Postal Regulatory
    Board to determine what it believes are comparable compensation levels
    in the private sector and then to forbid collective bargaining
    agreements to exceed those caps. Collective bargaining, where
    management and labor are supposed to meet and bargain on a level field,
    would become a sham if a presidentially-appointed political board
    suppresses wages by capping or even lowering the compensation levels
    that can be agreed to.
        Another troubling recommendation is the Commission's proposal to
    empower managers at the Postal Service to bargain away the pension and
    post-retirement health-care benefits of workers. These benefits, which
    are now established in statute, are based on longstanding congressional
    initiatives and commitments, keeping Postal Service employees under the
    same health and retirement benefits as federal civil service employees.
    Breaking these commitments and subjecting pension and retiree health-
    care rights to negotiation is an unwarranted step that could well
    result in reduced benefits and hardship to postal workers.
        I urge my colleagues on this Committee and in the full Senate to
    recognize the importance of maintaining our commitment to a
    professional and fairly compensated postal workforce, and to oppose
    these and other proposals that try to fix the Postal Service's problems
    on the backs of a workforce that delivers for each and every one of us
    every day.
        Despite my deep opposition to some of the Commission's workforce
    recommendations, I believe other aspects of its report are worthy of
    commendation. For example, as I mentioned earlier, I have long
    supported efforts to improve the transparency of the Postal Service's
    financial reporting. In the last Congress, I joined with other members
    of this Committee to successfully urge the Postal Service to provide
    more and better financial information on its website, but these
    improvements were only a beginning. Greater openness is an important
    first step toward fiscal health and accountability, and I support the
    Commission's recommendation that the Postal Service's financial
    reporting be enhanced. Whether this reporting should take the form of
    SEC-like requirements, as the Commission recommends, is a question that
    needs further study, but it is clear to me that the public and the
    mailing community, as well as the Postal Service itself, will benefit
    from this additional disclosure.
        I also agree with the Commission that we need to set qualifications
    ensuring a breadth of experience and skills on the Postal Board of
    Governors, and that this Board should operate in many ways like
    successful corporate boards now do. However, I am not convinced that
    allowing the Board members to select their own successors, as proposed
    by the Commission, is the right choice for a governmental entity like
    the Postal Service that must still be answerable to Congress and the
    public.
        Another worthwhile recommendation of the Commission urges the
    Postal Service to review its entire management structure to reduce
    unnecessary layers of management and to realign and modernize its
    organization. This review would help the Postal Service to optimize
    communications and efficiency throughout the organization and to
    effectively plan for the future.
        Finally, the Commission wisely reaffirmed certain basic principles
    fundamental to the future of the Postal Service, such as the concept of
    universal service and preserving the postal monopoly on First Class
    letter mail. However, I believe the suggested role of a new Postal
    Regulatory Board in ``refining'' these concepts requires additional
    review.
        Madam Chairman, I know there are many difficult decisions and
    discussions ahead as we consider these recommendations. This hearing is
    a good first step. I hope future hearings will allow us to hear from
    those most affected by the Commission's recommendations.

                 PREPARED OPENING STATEMENT OF SENATOR STEVENS

        I commend James Johnson and Harry Pearce for your efforts which
    created the final report of the President's Commission on the U.S.
    Postal Service. Each of you took on a great responsibility when you
    agreed to study the Postal Service and provide recommendations to
    improve it. I was particularly pleased to read that the Commission
    pledged its commitment to preserve universal mail service throughout
    the United States.
        My State of 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 two million pieces of mail to Alaskan
    homes and businesses, including vital products that would not otherwise
    be available in bush Alaska. My thanks to the Commission for
    specifically recognizing Alaska's unique needs and dependence on
    universal service. As the Commission's report notes, the near daily
    appearance of the Postal Service at virtually every home and business
    is essential to American commerce and society.
        I am also pleased the Commission has recognized the Postal Service
    should remain a public entity.
        Although I believe reform of the Postal Service is necessary, it is
    my belief that some aspects of the existing Postal Service should be
    preserved.
        Again, I commend the two co-chairs of the President's Commission on
    the Postal Service for their efforts and I look forward to the
    opportunity to further discuss the recommendations made in their
    report.

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