[Senate Hearing 108-508]
[From the U.S. Government Publishing Office]
S. Hrg. 108-508
POSTAL REFORM: SUSTAINING THE NINE MILLION JOBS IN THE $900 BILLION
MAILING INDUSTRY
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HEARINGS
before the
COMMITTEE ON
GOVERNMENTAL AFFAIRS
UNITED STATES SENATE
ONE HUNDRED EIGHTH CONGRESS
SECOND SESSION
__________
MARCH 9 AND 11, 2004
__________
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 Counsel
Susan E. Propper, Minority Counsel
Amy B. Newhouse, Chief Clerk
C O N T E N T S
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Opening statements:
Page
Senator Collins.............................................. 1, 33
Senator Durbin............................................... 5
Senator Carper............................................... 6, 39
Senator Voinovich............................................ 36
Senator Stevens.............................................. 47
Prepared statement:
Senator Lautenberg........................................... 67
WITNESSES
Tuesday, March 9, 2004
Ann S. Moore, Chairman and Chief Executive Officer, Time Inc..... 3
Mark Angelson, Chairman, President, and Chief Executive Officer,
RR Donnelley................................................... 6
Christopher W. Bradley, President and Chief Executive Officer,
Cuddledown, Inc................................................ 17
Max Heath, Vice President, Landmark Community Newspapers, Inc.,
on behalf of the National Newspaper Association................ 19
William J. Ihle, Senior Vice President, Corporate Relations, Bear
Creek Corporation.............................................. 22
Shelley Dreifuss, Director, Office of the Consumer Advocate,
Postal Rate Commission......................................... 24
Thursday, March 11, 2004
Michael L. Eskew, Chairman and Chief Executive Officer, United
Parcel Service................................................. 34
Frederick W. Smith, Chairman, President, and Chief Executive
Officer, FedEx Corporation..................................... 37
Gary M. Mulloy, Chairman and Chief Executive Officer, ADVO, Inc.. 48
Gary B. Pruitt, Chairman, President, and Chief Executive Officer,
The McClatchy Company, on behalf of the Newspaper Association
of America..................................................... 51
H. Robert Wientzen, President and Chief Executive Officer, Direct
Marketing Association.......................................... 54
Alphabetical List of Witnesses
Angelson, Mark:
Testimony.................................................... 6
Prepared Statement........................................... 75
Bradley, Christopher W.:
Testimony.................................................... 17
Prepared Statement........................................... 81
Dreifuss, Shelley:
Testimony.................................................... 24
Prepared Statement........................................... 107
Eskew, Michael L.:
Testimony.................................................... 34
Prepared Statement........................................... 129
Heath, Max:
Testimony.................................................... 19
Prepared Statement with an attachment........................ 85
Ihle, William J.:
Testimony.................................................... 22
Prepared Statement........................................... 97
Moore, Ann S.:
Testimony.................................................... 3
Prepared Statement........................................... 69
Mulloy, Gary M.:
Testimony.................................................... 48
Prepared Statement........................................... 161
Pruitt, Gary B.:
Testimony.................................................... 51
Prepared Statement........................................... 169
Smith, Frederick W.:
Testimony.................................................... 37
Prepared Statement........................................... 138
Wientzen, H. Robert:
Testimony.................................................... 54
Prepared Statement........................................... 183
APPENDIX
James N. Andersen, President and CEO, The Instant Web Companies,
prepared statement............................................. 192
American Forest & Paper Association, prepared statement.......... 198
Christopher McCormack, President and CEO, LL Bean, prepared
statement...................................................... 202
POSTAL REFORM: SUSTAINING THE NINE
MILLION JOBS IN THE $900 BILLION
MAILING INDUSTRY
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TUESDAY, MARCH 9, 2004
U.S. Senate,
Committee on Governmental Affairs,
Washington, DC.
The Committee met, pursuant to notice, at 10:04 a.m., in
room SD-342, Dirksen Senate Office Building, Hon. Susan M.
Collins, Chairman of the Committee, presiding.
Present: Senators Collins, Durbin, and Carper.
OPENING STATEMENT OF CHAIRMAN COLLINS
Chairman Collins. Good morning. The Committee will please
come to order.
Today marks the fifth in a series of hearings that the
Committee is holding to review the recommendations made by the
Presidential Commission on the Postal Service. Under the
effective leadership of Co-Chairmen Harry Pierce and James
Johnson, the Commission put together a comprehensive report on
an extremely complex issue, identifying the operational,
structural, and financial challenges facing the U.S. Postal
Service. The Commission's recommendations are designed to help
this 225-year-old Postal Service remain viable over the long
term.
So much depends upon the Postal Service's continued
viability. The Postal Service itself has more than 730,000
career employees. Less well known is the fact that it is also
the linchpin of a $900 billion mailing industry that employs
nine million Americans in fields as diverse as direct mailing,
printing, catalog production, publishing, and paper
manufacturing. The health of the Postal Service is essential to
thousands of companies and the millions that they employ.
One of the greatest challenges facing 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
each of the past 4 years. This is highly significant, given the
fact 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.
At our first hearing last September, the Committee heard
from President's Commission on the U.S. Postal Service Co-Chair
Jim Johnson. Mr. Johnson made the very important point that the
Postal Service's short-term fiscal health is illusory and that
Congress must not ignore the fundamental reality that the
Postal Service, as an institution, is in serious jeopardy.
The Presidential Commission presented its assessment of
this crisis in frank terms, concluding, ``An incremental
approach to the Postal Service reform will yield too little too
late, given the enterprise's bleak fiscal outlook, the depth of
current debt and unfunded obligations, the downward trend of
First Class Mail volumes, and the limited potential of its
legacy postal network that was built for a bygone era.'' This
is a very strong statement and it is one that challenges both
the Postal Service and the Congress to embrace far-reaching
reforms.
At the Committee's second hearing in November, we heard
from the Postmaster General and the Comptroller General. The
Postmaster General described transformation efforts already
underway at the Postal Service, many of which are consistent
with the Commission's recommendations. He also testified,
however, that legislation was required in order to accomplish
many of the other recommendations.
In his testimony, Comptroller General David Walker of the
General Accounting Office shared the Commission's concerns
about the Postal Service's $92 billion in unfunded liabilities
and other obligations. He pointed to the need for,
``fundamental reforms to minimize the risk of a significant
taxpayer bailout or dramatic postal rate increases.'' In fact,
since April 2001, the Postal Service has been listed on the
General Accounting Office's high-risk list.
More recently, the Committee heard from representatives of
the four largest postal unions, the Postmaster and Supervisor
Associations, the former Director of the Federal Mediation and
Conciliation Service, plus two experts on the issue of postal
pay comparability. The Commission's workforce-related
recommendations were discussed at length during those hearings.
Today, we will focus not only on the workforce and
financial recommendations, but also on the Postal Service's
monopoly and mission, the rate setting process, and corporate
governance issues. Among these recommendations are proposals to
grant a new Postal Regulatory Board the authority to refine the
scope of the monopoly and also to issue standards defining the
scope of the universal service application. I would note that
it is my judgment that many of those issues are best reserved
to Congress rather than being vested in a new regulatory board.
The Postal Regulatory Board would also be granted the authority
to transfer the existing rate setting process into an
incentive-based rate ceiling system.
As a Senator representing a largely rural State whose
citizens depend heavily on the Postal Service, I very much
appreciate the Postal 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 Mainers living near our
borders in Northern or Western Maine or on islands or in our
many small rural communities have the same access to the Postal
Service as the people in our large cities.
If the Postal Service were no longer to provide universal
service and deliver mail to every customer, the affordable
communications link upon which many Americans rely would be
jeopardized. Many commercial enterprises, indeed, most of them,
would find it uneconomical if not impossible to deliver mail
and packages to rural Americans at the rates charged by the
Postal Service.
We must save and strengthen this vital institution upon
which so many Americans rely for communication and for their
jobs. The Postal Service has reached a critical juncture. It is
time for action, both by the Postal Service itself and by
Congress.
Senator Carper and I have committed to working together
with many other Members of this Committee to draft a bipartisan
postal reform bill. Now, given the history of previous attempts
at legislative reforms, I know that this will be a daunting
challenge. It is not coincidence that the last reform was done
more than 30 years ago. But it is essential if we are to
preserve the Postal Service into the 21st Century that we seize
the opportunity presented by the Commission's excellent work.
I welcome our witnesses today who are from the mailing
community. We will hear a variety of views and insights on the
recommendations of the Presidential Commission and I am pleased
to welcome our first panel of witnesses today.
Ann Moore is the Chairman and the Chief Executive Officer
of Time Inc. In this position, Ms. Moore oversees all of the
businesses of Time Inc., which is the world's leading magazine
company and a leading direct marketer of music and videos. Her
work at Time, Inc. has earned her numerous awards and honors,
including her appearance on Fortune magazine's list of the 50
most powerful women in American business.
Mark Angelson is the Chief Executive Officer of RR
Donnelley. I would note that he has held that position for all
of 9 days, but we are very pleased that he could be with us
today. Mr. Angelson assumed his new position when RR Donnelley
and Moore-Wallace Corporation combined, creating the new RR
Donnelley, which is the largest printer in North America. Prior
to this position, Mr. Angelson was the Chief Executive Officer
of Moore-Wallace, Incorporated, the third-largest printing
company in North America and was the principal architect of the
merger.
We are very pleased to welcome both of you here today. We
know you are both extremely busy individuals and I think it
demonstrates just how important postal reform is that both of
you, as CEOs of major corporations, would take the time to be
here today.
Ms. Moore, we will start with your testimony.
TESTIMONY OF ANN S. MOORE,\1\ CHAIRMAN AND CHIEF EXECUTIVE
OFFICER, TIME INC.
Ms. Moore. Thank you very much, Chairman Collins, for this
opportunity to discuss the crucial issue of reforming the U.S.
Postal Service. As you said, I am Ann Moore, the Chairman and
CEO of Time Inc. We are the world's largest magazine publisher
with 134 magazines, including Time, People, and Sports
Illustrated.
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\1\ The prepared statement of Ms. Moore appears in the Appendix on
page 69.
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I have been involved in postal reform for a long time. I
actually volunteered to work on this back when I was President
of People magazine because there is no issue that is more
crucial to the magazine business and to magazine readers than
the future viability of the Postal System. The great majority
of our readers depend upon the postal system to deliver their
magazines, so we need to work together to ensure that this can
continue over the long term. It affects everyone, from the mom
who reads Parenting to the sports fan who reads Sports
Illustrated.
The core value of the Post Office has always been reliable,
affordable delivery of the mail to every American home and
business. We know that Congress wants to maintain this goal and
we have this wonderful opportunity to pass a meaningful,
comprehensive reform bill and we are committed very much to
getting this done.
The current Postal Service business model is not
sustainable, as we all know, in a climate of expanding
addresses and declining mail volume, and we applaud the efforts
of Jack Potter to reduce Postal Service costs. But reducing
costs alone won't solve the problem. Broad and sweeping reform
is required.
President Bush and the Treasury deserve thanks for creating
the Presidential Commission to help address these issues and we
completely support the report's five core principles.
We also support the Commission's recommendations on
revisions to the collective bargaining process. Negotiators on
both sides must know that today's system of binding arbitration
does not always provide an optimal solution and we feel that
mediation arbitration might bring parties closer to an
equitable resolution while protecting the interests of the
employees and the Postal Service.
However, it is also crucial that a rational rate cap system
be put in place by Congress. The dramatic rate increases we
have seen are simply not acceptable. As a result of rate
increases in recent years, postage expenses have become our
single biggest line item at Time Inc. This often surprises
people, but this year, we will spend more than $500 million on
postage. We actually spend more on postage than we do on paper
or printing. We spend more on postage than any other company in
America, so we are acutely aware that postage costs have been
going up at a rate that far exceeds the rate of inflation.
These statistics are documented in our written testimony.
In 2001 and 2002, we experienced three rate increases within an
18-month period. If you go back to 1986, magazine postage costs
have gone up by 220 percent. This is nearly double the rate of
inflation.
From our own experience, we know that these rising postal
costs drive mail volume out of the system, which compounds the
problem. That is why Congress needs to institute a rational
rate cap system.
Today's rate system fails to provide the Postal Service
with strong incentives to hold down costs, too. It also fails
to provide mailers with predictable rates. Give us predictable
rates and we will give the Postal System more volume, from our
current magazines to all the new ones I would really like to
launch.
We have a lot of creative ideas on the drawing board,
magazines that consumers tell us they want, but if I cannot
predict the future costs of mail and the long-term costs of a
new launch, the risk of building a new magazine is too great. I
don't need to tell you that ventures like new magazines create
jobs at Time Inc. and beyond. While I have 15,000 employees at
Time Inc., you could count all the suppliers that depend upon
us, from the paper mills in Maine to the printers to the mail
houses. There are many jobs at stake. So for all of these
reasons, it is crucial that rates be capped to an inflation
benchmark.
Now, of course, rate caps must not be met at the expense of
good service, so any reform bill must also include service
measurement systems and delivery standards for all classes of
mail. In addition, rates need to be based upon cost and include
the proper incentives for mailer work sharing. This concept
provides the Postal Service and the mailing community an
incentive to seek the lowest possible cost and the highest
quality service.
Before I conclude, I want to comment on last year's CSRS
legislation. This bill provided much needed relief for the
mailing industry. Thank you for getting it passed. That said,
the bill has two problem items that need to be addressed.
First, the bill's escrow provision will force mailers to
pay an additional $4 billion to the Postal Service in 2006.
This item alone will add another 5.4 percent increase to
postage rates.
Second, the CSRS bill also shifted $27 billion in military
retirement costs from the Treasury to the Postal Service. Since
approximately 90 percent of these costs date back to before the
establishment of the Postal Service in 1971, these military
costs are not really the responsibility of the people who rely
on the Post Office.
So in summary, Time Inc. believes that the issues
challenging the Postal Service are urgent and demand action by
Congress and the Postal Service. We need three things:
Predictable rate increases that do not exceed the rate of
inflation, resolution of the CSRS escrow and retirement issues,
and service standards for all classes of mail.
I am personally committed to working with you and all
interested parties to help implement urgently needed Postal
reform. Thank you again, Madam Chairman, for this opportunity
to share the views of Time Inc. with this Committee.
Chairman Collins. Thank you for your testimony.
Before hearing from Mr. Angelson, I would like to give my
two colleagues a chance for any brief opening comments that
they might want to make. Senator Durbin.
OPENING STATEMENT OF SENATOR DURBIN
Senator Durbin. Thanks a lot, Madam Chairman, and I will
take your advice to make it brief. I want to welcome both of
our witnesses, Ms. Moore as well as Mr. Angelson. Of course, he
is with RR Donnelley, which is a major employer in Chicago, a
city that I am honored to represent, new to the job a few days,
and happy to have you here.
Ms. Moore indicated that Time Inc. is one of the largest
customers of the Postal Service, and I know that RR Donnelley
is the company that is the largest private user of the U.S.
Postal Service. I think that is why this particular hearing is
so important, so we can understand not only the reform of the
Postal Service, on which the Chair has been our leader, but
also its impact on private business and how we can try to
develop some synergies and try to make it more efficient.
So I thank both of the witnesses for coming. Particularly,
Mr. Angelson, thank you for the great work that RR Donnelley
does in the Chicagoland area, all around the United States, and
the world.
Thank you, Madam Chairman.
Chairman Collins. Thank you. Senator Carper.
OPENING STATEMENT OF SENATOR CARPER
Senator Carper. Just a quick note to say welcome. Thank you
very much for making time out of your day and week to join us
and to share your testimony with us.
We are attempting to undertake here something that hasn't
been undertaken for over three decades, and that is to try to
figure out what our Postal Service should look like going
forward. As we attempt to design and develop and build a
consensus around the Postal Service in the 21st Century, your
input is welcome.
I just want to say to the Chairman, this is not the last
but one of many in a very helpful series of hearings that
enable us to learn and hopefully will bring us a step closer to
consensus. We will find out just how successful we have been in
that in a month or two, so thanks very much.
Chairman Collins. Thank you. Mr. Angelson.
TESTIMONY OF MARK ANGELSON,\1\ CHIEF EXECUTIVE OFFICER, RR
DONNELLEY
Mr. Angelson. Madam Chairman, thank you for inviting RR
Donnelley to testify this morning and good morning to you.
Thank you, Senator Durbin from the great State of Illinois,
where we live and are headquartered. Senator Carper, from the
great State of Delaware where we are incorporated, thank you
for having us this morning.
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\1\ The prepared statement of Mr. Angelson appears in the Appendix
on page 75.
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Chairman Collins. And so what are you doing for Maine?
[Laughter.]
Mr. Angelson. We are buying more paper than you can
possibly imagine.
Chairman Collins. I thought that might be the answer.
[Laughter.]
Senator Carper. I think that covers all the bases here.
[Laughter.]
Mr. Angelson. I am Mark Angelson, Chief Executive Officer
of RR Donnelley. Thank you for the slack that I hope you will
cut me for the fact that this is day nine on the job. Thank you
very much. And while I have always known that a healthy,
viable, and most important, affordable Postal Service is
essential to our country and to our economy, when I found out 9
days ago that it costs our customers more to mail a catalog or
a magazine than it does for us to manufacture it, I knew it was
important that I be here with you and with our fine customer,
Ms. Moore, this morning.
As you may know, RR Donnelley is the largest commercial
printer in North America and perhaps in the world. As a result,
that makes us one of the largest, if not the largest, users of
the U.S. Postal Service.
In addition to being a printer, we also enter nearly nine
billion pieces of printed material into the mail each year,
including magazines, catalogs, direct mail, telephone bills,
and other highly personalized statements on behalf of
customers, customers like Ms. Moore, who sits beside me this
morning.
Our employees and our customers see, feel, and experience
every single day the consequences of a Postal Service in bad
need of reform. RR Donnelley fundamentally supports the
recommendations of the President's Commission and we urge
Congress to push ahead now with the necessary changes. If we
continue to put off reform, we will no longer be in the
advantageous position of passing thoughtful, comprehensive
reform, but may, in fact, be in a position where we have to
respond to a crisis.
Change is essential to the health of the U.S. mailing
industry as a whole. I know that you have heard these numbers
before, but I find them so compelling that I feel impelled to
say them again. This is a $900 billion industry which accounts
for 9 percent of the gross domestic product and nine million
jobs.
Just a short word, if I may, about jobs. At a time when
many manufacturing jobs are at high risk of moving abroad, I am
as sure as I am that it will be dark tonight and light tomorrow
morning that your local letter carrier's job will never move
overseas. Reforming the Postal Service, therefore, is also an
opportunity to strengthen a sector of American jobs that stay
in America.
This hearing today, therefore, is about much more than
reforming the Postal Service. It is about the economy, it is
about jobs, and it is about the future.
The postal distribution system as it stands today is
inefficient. The President's Commission recognized these
inefficiencies and now recommends changes. I hope that you will
agree with the Commission and with RR Donnelley and our fine
customer that there is substantial potential for improvement
here and that the time to do it is now.
Any piece of legislation, though, that protects the status
quo will not be sufficient and will not be acceptable under the
circumstances. At its heart, the Postal Service must change.
Respectfully, it must change to allow, to encourage, and better
yet, to demand ongoing improvement. In doing so, the Postal
Service can function more like a business to the benefit of
everyone involved. When I say more like a business, let me
hasten to add we are not talking about losing jobs for people.
We are just talking about using common sense.
With my limited time, I would like to focus on just three
areas, work sharing, network optimization, and the civil
service retirement issue.
In today's world where technology is constantly changing to
allow for new improvements, no company can do everything. As a
result, we have all learned to focus on our core competencies
and to rely on others and their expertise in order to maximize
our performance. The Postal Service should do this, too.
Delivering the mail to and from every address in the United
States 6 days a week, otherwise known as universal service, is
the USPS' core competency. It is simply what they do best. All
of the rest, I suggest respectfully, should be left to those
who can do it better, and this combination is what we call work
sharing, as you know.
Work sharing frees up the Postal Service to focus on its
core competency while having others, such as RR Donnelley,
focus on the non-core competencies. This highly effective
combination drives down cost. In fact, according to the General
Accounting Office, in 1999 alone, work sharing saved the USPS
an estimated $15 to $17 billion. Yet, and this is a very
important point, even though there is proof that this works, it
is as difficult today to enter into a work sharing agreement
with the Postal Service as ever before. It is simply not a
widely accepted practice.
Let me give an example. RR Donnelley and others recently
reached an agreement with the USPS on co-palletization. The
deal took 18 months to reach, and in the end, all we were
granted was a 3-year trial. That same deal, if I were to try to
make it with a typical private sector partner, would have taken
4 weeks, 6 weeks, or 8 weeks. We shouldn't have to work this
hard to persuade our partner at the Postal Service to reach a
result that benefits customers, that benefits the U.S.
Treasury, the Postal Service, and, therefore, all users of the
system.
The second subject that I would like to address is network
optimization. It is inconceivable to me that there have not
been ongoing adjustments in the USPS network, but there haven't
been. The Postal Service's current distribution network was
established over 30 years ago and it has remained virtually
unchanged ever since. That is astonishing when one thinks about
the changes that have occurred in that same period, changes
that have had a direct impact on how we use and how we would
like to use the USPS. From major trends like population shifts
to the invention of E-mail, the country is different now, but
the USPS remains the same, and respectfully, I would urge you
that that has to change.
The USPS must be allowed and incentivized to keep pace with
change. Facility locations, size, and transportation routes
should be changing constantly to keep up with demand, to
eliminate redundancy and overcapacity, and to achieve
productivity gains. All successful businesses constantly adjust
to changes in customer traffic, demographics, and other
factors, especially service businesses like the USPS.
Put simply, the USPS must be allowed constantly to realign
its network to reflect current realities, free of emotion, and
respectfully, Senators, free of politics. If changes of this
nature are not an ongoing, unencumbered process, all the
legislation in the world will not make the Postal Service run
better, nor more smoothly, nor more efficiently.
Work sharing coupled with network optimization makes it
possible to achieve what we call the lowest total cost. This
concept is at the core of what RR Donnelley and our fine
customers hope to have from the USPS.
And a final word on the civil service retirement problem.
First, I ask respectfully that Congress consider removing the
CSRS savings escrow requirements that were created last year.
Doing this will free up approximately $73.3 billion that the
Postal Service can use to pay down its debt to the U.S.
Treasury and to hold postage rates steady, among other things.
Second, there is no good reason for the Postal Service to
bear the financial burden of the civil service military
retirement benefits. No other Federal agency is required to do
this. If the Treasury doesn't assume these costs, the result is
simply that the costs will immediately be imbedded in the price
of a stamp. In other words, mailers, not just RR Donnelley and
Time Inc., but many small businesses and American families
inappropriately will be paying these retirement costs. Let us
not make the job of the Postal Service even more difficult by
keeping this financial burden on its back, please.
We have a chance right now, a real opportunity, to make the
necessary changes to assure that the U.S. Postal Service and
the mailing industry as a whole remain healthy and viable.
Several more years of business as usual could bring us to a
point of dangerous disrepair.
I thank you for the honor and privilege of appearing before
you this morning. Thank you very much.
Chairman Collins. Thank you very much, Mr. Angelson.
I am very pleased that you reiterated the startling
statistics about the impact of the Postal Service on our
Nation's economy and on some nine million jobs. One of the
witnesses on our second panel, a catalog owner from Maine, was
the one who first told me about that impact and I think most
people are startled to realize that the Postal Service has such
an economic impact.
When I look at both of you, you really represent that
impact. Time magazine buys paper from a mill in Bucksport,
Maine. You print on that paper. The interrelationship between
the paper manufacturers, the printers, the publishers, and the
ability for you to buy lots of paper from a Maine mill depends
directly on affordable, reliable, and predictable postal rates,
and I think in the debate that we can't lose sight of the fact
that if the Postal Service's rates soar or become completely
unpredictable, that it is going to have a negative impact on
both of your operations and on those paper mills back home in
Maine.
Could you comment, Ms. Moore, on the economic impact of
unpredictable and high postal rates on Time magazine?
Ms. Moore. Whenever we have had an unpredictable postage
increase, we first scramble to do everything we can within our
own business formula. That might mean reducing the size of the
magazine. We have had wonderful paper suppliers who have done a
miraculous job of lowering the weight of paper. The technology
improvements out of the paper industry have been really just
fabulous. But those things we can do internally to our physical
products only can go so far.
With three price increases, we really had to scramble to
cut back on mailings, on volume. It prevents us from launching
new magazines, and then ultimately, we have to pass that price
on to our reader, and it has not been a welcome increase over
the last 3 years.
Chairman Collins. Mr. Angelson.
Mr. Angelson. I would add very briefly, Madam Chairman,
that when Time Inc.--when postage rates go up and Time Inc.,
and others mail less, we print less and the impact on jobs that
we are trying to avoid is, in fact, compounded in the other
direction.
Chairman Collins. Thank you. Some of the most controversial
recommendations made by the Commission have to do with the
Postal Service's workforce. Now, I don't support personally all
of those recommendations, but I do believe that we cannot
ignore the workforce issues given that 75 percent of the Postal
Service's costs are directly related to its workforce.
You have both stressed in your statement the need to deal
with the escrow account and the military pension issues, which
I completely agree with. Senator Carper and my bill last year
did not have the escrow account in it. That was added on the
House side and I, for one, am committed to reversing that
provision.
But those are only two of the issues that affect the
workforce. Ms. Moore, if we are going to be serious about
tackling postal reform, can we ignore those workforce
recommendations?
Ms. Moore. It is not possible to have meaningful postal
reform without addressing the labor issues, and I view labor,
however, as a key partner in reform. We have to do everything
in our power to address their concerns, but when you have labor
representing almost 80 percent of the costs, they have got to
be willing to do their share to provide for the future of the
Postal Service.
That number, by the way, is astounding. I did go back to my
own company because I believe I am a labor-intensive industry.
I buy paper from your State and I use his presses, so I have a
labor-intensive business. I only employ people, talented
writers and reporters, but labor only represents 35 percent of
my cost base. So that 75 to 80 percent cannot be ignored, and I
think I saw a quote from Senator Durbin recently which I think
says it all, and that was that we all should be willing to give
a little to pass meaningful reform.
Chairman Collins. Mr. Angelson.
Mr. Angelson. Thank you, Madam Chairman. I would add that
we are talking about predictions for adding 1.7 million
addresses in the United States every year going out for 10
years, as far as we can see at this point. During that period
of time, there will be natural attrition in the workforce of
the U.S. Postal Service and we think that those are two
statistics that, when worked together, will allow us to address
this difficult issue in partnership, if you will, with our
colleagues on the labor side so that we can get this done
without inappropriately breaking anyone's rice bowl, if you
will.
So we think, yes, it needs to be addressed, the labor
issue, but we think it can be addressed in a way that suits the
needs of all the constituencies.
Chairman Collins. You raise a very important point.
Addressing the workforce issues does not mean laying off
thousands of postal workers. In fact, 47 percent of the current
workforce will be eligible for retirement within the next 10
years. So there is an opportunity to right-size the force
without resorting to widespread layoffs.
But there are obviously many other issues involving
workers' compensation, the collective bargaining system, where
I think we can make some reforms that will be beneficial to the
workforce as well as in holding rates down.
Senator Durbin.
Senator Durbin. Thank you, Madam Chairman.
Illinois is a wonderful State and it is pretty flat. As you
travel downstate, where my home is, cornfields and soybean
fields in every direction as far as the eye can see. About 100
miles south of Chicago on Interstate 55, the old Route 66,
there appears a mountain range. It startles you. You can't
imagine, what is this all about? Well, it is because within a
quarter mile of the interstate is a landfill and the landfill
is huge, and I look at it every time I go by and it is growing.
Maybe someday we will have a ski resort there, I don't know. It
is not likely, but possible.
But it points to a real serious issue which I would like to
address for a moment here because I can't think of two more
important witnesses. Most of that bulk in that landfill is
paper, and it strikes me as odd that in this conversation about
looking to the future, which the reform of the Postal Service
is all about, there is very little conversation about paper
other than making certain that you do business in Maine, which
is important to our Chairman. [Laughter.]
Senator Durbin. A few years ago, I had a notion that
perhaps we should encourage the use of more recycled fiber and
perhaps even offer incentives in postal rates for those who
would have a certain percentage of their product in recycled
fiber and a concomitant penalty for those that didn't, creating
an incentive that some of the catalogs and magazines that I
receive would have at least some recycled fiber content.
I couldn't have ever anticipated the firestorm of
opposition to that wildly radical idea. Everybody was against
it, everybody, the unions, the Postal Service, those who print
the magazines and those who write them. Everybody thought this
was a completely irresponsible notion.
I am going to revisit that for a moment here, because I
can't think of two better witnesses. Ms. Moore, of all the
publications out of Time Inc., what would you say is the
percentage of recycled fiber and paper that you use in your
publications?
Ms. Moore. I don't know the percentage. I know that we
certainly have been very aware of the whole environmental
issue. We have done wonderful work, actually, with our paper
suppliers on the subject of chemicals and working hard to get
recycled. I know that currently, 100 percent of our newsstand
unsold copies are recycled and we are working right now on a
recycle pilot project, I think in Boston, the City of Boston.
So it is something--I get this question at the annual
meeting every year. It is something that we have been very
aware of and that we are working hard on. But currently, we
don't have a high percentage of recycled fiber in our current
printing plants. I think a lot of the work done in the last
couple years by the paper industry to lower the weight of our
paper has done a lot of good in keeping that landfill down.
Senator Durbin. Is it beyond the realm of possibility that
some percentage of your publications would be recycled fiber? I
understand that perhaps the covers and some of the features and
the color pages and such, maybe recycled fiber isn't always
appropriate. But is it beyond the realm of possibility to say
that a certain percentage of your publication would be recycled
fiber?
Ms. Moore. To make that mandatory? At the moment, it is not
economically viable.
Senator Durbin. It is too expensive? Recycled fiber is too
expensive?
Ms. Moore. Yes, sir.
Senator Durbin. Dramatically? I mean, is it marginal or----
Ms. Moore. Dramatically.
Senator Durbin [continuing]. Dramatically more expensive.
Of course, you don't have to factor in the cost of the landfill
nor the impact on what that means to a community which becomes
a social cost which a lot of places around the world have
decided is an important part of the equation.
Mr. Angelson, I know you are new to the job and I don't
want to put you on the spot, but could you comment on that
issue?
Mr. Angelson. I can speak personally and I can speak a
little bit on behalf of RR Donnelley and would ask that we be
allowed to respond more formally in due course.
Senator I agree with you that our children and our
grandchildren and their grandchildren need to live on this
planet and I applaud the spirit which moves you in the
direction in which you are moving. We at RR Donnelley have long
recycled the scrap paper that comes off the cutting, etc., as
we prepare our products for our customers. To a very
significant extent, though, our customers do the paper buying,
if you will, and we do the printing on it. I would be grateful,
in light of my 8 or 9 days on the job, if you will let me duck
on this one.
Senator Durbin. I want to revisit it, and I hope I can find
some common ground with our Chairman. I know this is a delicate
issue for her and it is an important industry in her State, but
I know she is also sensitive to the environment that we live in
and I thank her for her leadership and I thank you both for
your testimony. Thanks, Madam Chairman.
Chairman Collins. Thank you. Senator Carper.
Senator Carper. It is kind of ironic that my colleague,
Senator Durbin, raised that issue, because last night when I
brought my boys home from the Troop 67 Scout meeting, we did
our recycling. We recycle twice a week. It is picked up at our
curb in front of our house in Wilmington, Delaware, by a firm
that we actually pay to pick it up because we don't have
curbside recycling. I am proud to report I think we now may
actually recycle more than we put out in our trash can once a
week, which is no small achievement.
I certainly share his interest in recycling and that is not
the reason for our hearing today. One of the things that I
learned, I learned as a Governor when we were trying to reduce
the amount of land that we had to set aside for landfills, one
of the things that I learned is that in order to make recycling
pay, we have to find folks who are willing to buy the recycled
products.
I would just ask Mr. Angelson, you are new in your job. Ms.
Moore, you are not so new. I would ask that you take to heart
the comments that Senator Durbin made. Those are ones that I
share, as well.
In terms of what in the magazines might lend itself to
being recycled, maybe not the cover, maybe not the pages
inside. But you know those little inserts, like those little
postcards you have to mail? Those really get in the way, and--
-- [Laughter.]
Ms. Moore. Senator Carper, all insert cards are 100 percent
recycled paper, you will be happy to know.
Senator Carper. I should have guessed. I will feel more
kindly toward those postcards in the future, armed with that
knowledge.
Mr. Angelson, have you testified previously before a
Congressional Committee?
Mr. Angelson. I have not, Senator.
Senator Carper. What was it like?
Mr. Angelson. It feels just like home. I have three
intelligent, I hope, and active and interested daughters and it
feels like the dinner table, so----
Senator Carper. That is good. I think you did a nice job,
and Ms. Moore, you certainly did, as well. I knew you would.
Ms. Moore, would you go back and just share with us those
three points? You closed your testimony with three points. I
just want to revisit those for a moment, if we could.
Ms. Moore. What are the three things that are kind of
``must haves'' in the reform bill? We would like you to resolve
the escrow provision in military retirement. We would really
like you to implement, Congress to implement, a CPI cap for
rate increases. And finally, we really would like service
standards for all mail classes. It is not enough just to have
the low-cost provider. We need reliable service standards for
all classes of mail.
Senator Carper. We have had some discussion here amongst
ourselves and with the Commission appointed by the President as
to who might be responsible for establishing those service
standards and what kind of reward or punishment might be meted
out for failure of the ability to meet those service standards.
Would either of you care to give us some advice on those
points?
Ms. Moore. Well, I think you want to implement--I think you
want to follow best practices as you do in the business
community. You want to first start with cost-based rates.
Please make us pay for what we use. If I am inefficient in
giving you a direct mail piece that can't be scanned, you
should punish me with higher rates for that piece of mail. You
can incent the users of the Post Office to help drive costs
out. And I also think you want to do things like pay for
performance. You should incent the management of the Postal
System to be rewarded for running a low-cost, affordable
service.
Mr. Angelson. I would agree with Ms. Moore, Senator. I
would add that it is very important that in maintaining
universal service, that Congress reserve to itself ultimately
the right to regulate that monopoly for the benefit of all
American citizens with the idea of having corporate governance
in place for the Postal Service, which, as you know, if it were
a Fortune 500 company, based on 2003 statistics, it would be
number 11 in the Fortune 500. Governing it like a business,
subject, of course, to reserving the right of Congress to
maintain its most fundamental oversight, we think would be a
very good thing.
Senator Carper. With respect to governance, let us talk
just a little bit about the makeup of the Board of Governors.
As you know, there is no requirement in the law that they have
to have background experience consistent with the work that the
Postal Service does. I think they serve fairly long terms, I
want to say maybe 9-year terms. I believe for the most part
they are selected by the President, nominated by the President,
confirmed by the Senate.
The Commission has made some recommendations in this area.
Several people would be appointed, nominated by the President,
confirmed by the Senate. The rest would be independent Board
members. There would be a requirement that these folks would
have to generally have some experience that is consistent with
the nature of the work of the Postal Service does. And rather
than serving maybe 9-year terms, they would serve much shorter
terms.
Now, each of you have experience with corporate boards of
your own and I just ask you to reflect on your own experience.
Think about what we are contemplating with regards to the
structuring of the Postal Service Board and tell us how you
think we ought to proceed.
Ms. Moore. I was absolutely thrilled with the President's
Commission and how you could attract two bipartisan chairs as
experienced as Mr. Johnson and Mr. Pierce, and I wonder why you
couldn't attract the same kind of experienced talent to the
Postal Board, because here it has an enormous impact on the
economy, on jobs, and I see no reason why you shouldn't recruit
to the Postal Board this same thing we would do in manning a
Fortune 500 board. I think there are a lot of able people with
experience who would be willing to serve a limited term to get
the job done in the future. That has not been done in the past,
and I see no reason why you couldn't call on a lot of able
people in the business community to fill some of those seats.
Mr. Angelson. Senator, I agree completely with Ms. Moore's
remarks. In manning or womanning a private company board, we
have had great success in choosing people--and again, these
aren't the people who are going to actually be on the ground
executing the decisions. These are people who follow the adage
that when one has a symphony orchestra, one needs 100 people
and there is somebody to play the triangle and somebody to play
the drums and somebody to play the French horn, etc. We find
that a broad cross-section of views from people with a broad
and diverse cross-section of backgrounds most help in doing
this.
It is a business, Senator, as you know, the Postal Service,
and we think it ought to be run like a business, again, subject
to preserving jobs where we can do so.
Senator Carper. I realize my time has run out. Could I just
ask one other quick one?
Chairman Collins. Certainly.
Senator Carper. It relates to the line of questioning on
the board. Do you recall what your board members are paid, just
roughly, or your directors' fees? I presume that is public
knowledge.
Ms. Moore. I would say, typically--I think there is a broad
range--I would say typically a board member of a Fortune 500
probably makes around $50,000 a year, often paid in stock, not
in cash. That is a guess, but I think that is what I recall. I
am on the nominating committee of a Fortune 500 company.
Mr. Angelson. I think that Ms. Moore's guess is very close
to right. There is--in governance, and you might not have this
advantage when you put together a governance body for the
Postal Service, because paying them in stock is something that
I am not sure would induce them to necessarily perform to their
utmost. I would have said, if we were in an all-cash
compensation system, that something around $50,000 would
probably be right.
Ms. Moore. But I would also add to that that I think you
could probably, because of the importance of this, most sitting
CEOs don't sit on the boards of companies any more for the
compensation. It is a lot of hard work and it is vital to the
health of our businesses. I think it would not be money that
would attract us to the board, but helping the Postal Service
stay strong.
Senator Carper. Amen. Thank you. Thanks, Madam Chairman.
Chairman Collins. Thank you, Senator.
Ms. Moore, you indicated that one of your top three
priorities is the establishment of an inflation-linked rate cap
for the Postal Service. Under the Commission's recommendation
for such a cap, the Postal Service would have the ability to
set rates below that cap.
That leads me to ask you two questions. One, do you have
any concern that the Postal Service would immediately jump to
the cap, and second, should there be some sort of after-the-
fact review of the rate structure to make sure that the Postal
Service is not taking undue advantage of that latitude?
I understand the need to have more flexibility, more
predictability, and to get away from the current adversarial
process, which can take as long as 18 months. But there are
also risks with just allowing the Postal Service to set its own
rates without review. Could you comment further on that?
Ms. Moore. Well, it is one of the reasons I would love
Congress to set the inflationary cap guidelines. I could live
with the Post Office having such a system and having the
flexibility to raise rates up to that cap because it gives me
predictability. I could budget for up to inflation every year
or what the cap is.
I think that what you want to counter with is a pay for
performance. Remember, we want to incent the management of the
Post Office to run a low-cost efficient business. Not only does
it take 18 months whenever the current system requires a rate
hearing, but I have to tell you, I spend almost $1 million in
providing reports every time there is a rate increase. The
sheer waste of the current system is just intolerable.
So I think we would all be very happy to live with a rate
cap system. I don't fear that the management would
automatically go to the top cap if we incented them properly to
run the Post Office as a business.
Chairman Collins. Thank you. Mr. Angelson, do you have
anything you would like to add?
Mr. Angelson. I would support Ms. Moore's comments yet
again. For us, it is about stability and predictability.
Chairman Collins. I want to thank you both very much for
your testimony. We look forward to working with you.
Senator Carper. Madam Chairman, could I ask just one last
question?
Chairman Collins. Certainly.
Senator Carper. Mr. Angelson, I think it was you who spoke
about how difficult it is to get the Postal Service to enter
into a work sharing agreement. Would you just go back and
briefly revisit that for us and maybe tell us what you think
causes that difficulty and whether you believe that we ought to
be doing something legislatively to make it easier to do work
sharing?
Mr. Angelson. Senator, it is about bureaucracy and it is
about, if I may, concern about or fear of change. It is about
entrenched ways of doing things. And yes, we would welcome any
contribution that this Committee and ultimately the Congress of
the United States could make to easing the way toward making
the U.S. Postal Service a more business-like partner.
Senator Carper. Thanks very much. My thanks to both of you.
Mr. Angelson. Thank you.
Ms. Moore. Thank you.
Chairman Collins. Thank you. I want to thank both of our
witnesses. Your testimony was extremely helpful and we look
forward to working with you as we go forward and as Senator
Carper and I draft our bill, so we would welcome any future
advice that you might have for us. Thank you.
Ms. Moore. Thank you.
Mr. Angelson. Thank you very much.
Chairman Collins. I would now like to call forth our second
panel of witnesses. Chris Bradley is the President and Chief
Executive Officer of Cuddledown, Inc., a manufacturer and
catalog retailer of fine home furnishings based in Portland,
Maine. Mr. Bradley also serves as the Vice President of the New
England Mail Order Association of America.
Max Heath is the Vice President of Circulation, Postal and
Acquisitions for Landmark Community Newspapers, Inc., of
Shelbyville, Kentucky. Landmark Community Newspapers has 53
weekly and daily newspapers in 13 States and Mr. Heath is in
his 18th year as Chair of the Postal Committee of the National
Newspaper Association.
William Ihle is the Senior Vice President of Corporate
Relations for the Bear Creek Corporation of Medford, Oregon.
Bear Creek owns the well-known catalogers Harry & David and
Jackson & Perkins. Mr. Ihle supervises all public relations,
community relations, and government relations for the family of
companies in this country and overseas.
And finally we are going to be pleased to hear from Shelley
Dreifuss, who is the Director of the Postal Rate Commission's
Office of Consumer Advocate. She was appointed to this position
in April 2002 and has 25 years of litigation experience
representing consumer issues in the Office of Consumer
Advocate. I would note that her primary duties are the
protection of consumer and small business interests in rate and
classification cases before the Postal Rate Commission.
Mr. Bradley, we are going to start with you, not only
because you are my constituent---- [Laughter.]
But also because you were the first person to educate me on
the broader economic impact of the Postal Service. You
organized a meeting of some 22 businesses in Maine, ranging
from printers to paper manufacturers to LL Bean and everything
in between and it really was an eye-opener for me about the
link between affordable, reliable postal rates and the jobs
that we have in our State and nationwide. So thank you for that
education and I am pleased to ask you to proceed with your
testimony.
TESTIMONY OF CHRISTOPHER W. BRADLEY,\1\ PRESIDENT AND CHIEF
EXECUTIVE OFFICER, CUDDLEDOWN, INC.
Mr. Bradley. Thank you, Chairman Collins. Cuddledown is a
small company located in Portland, Maine. We manufacture down
comforters and pillows with most of our marketing done through
a catalog we mail throughout the United States. We currently
have 86 employees. Over the past 15 years, we have grown our
sales from less than $1 million to more than $20 million. The
engine for this growth has been our catalog and the U.S. Postal
Service has been an essential partner in getting our message to
our customers. I am here before you representing a small
business that is dependent on a functional and affordable
Postal Service.
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\1\ The prepared statement of Mr. Bradley appears in the Appendix
on page 81.
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Cuddledown prints and mails more than ten million catalogs
each year. Our annual postage bill is roughly $3 million, but
the impact of our business extends beyond that. We print our
catalog in Mississippi and we use about 2,000 tons of paper
each year, also manufactured in this country. The total value
last year of our payroll, FICA tax, workers' compensation
insurance, life insurance, long-term disability insurance,
short-term disability insurance, health insurance contribution,
and 401(k) contribution was $3 million. And like so many mail
order companies, Cuddledown is located in a rural part of the
country where good jobs are highly valued.
Mail order and the Internet allows small companies to
spring up all over the country to grow, create jobs, be
successful, and to realize the American dream. But the future
of this dream now depends on the legislation this Committee
crafts to reform the Postal Service. Without substantial
reform, it is expected that we will once again see rate
increases far in excess of inflation.
The last rate increase in June 2002 raised standard mail an
average of 8 percent. For Cuddledown, that meant an increase in
our postage bill of $240,000. That is eight good jobs at
$30,000 per job that we would need to cut just to stay even.
Given the weak economy and the job cuts that we have already
seen, to cope with declining sales, large increases in postal
rates will result in small business failures in my industry.
Reform is clearly needed and the President's Commission has
outlined the reforms that need to be put in place. In reading
the Commission's report and published comments from other
involved parties, it seems clear to me that reform would
include the following: Elimination of the escrow account for
overpayments into the Federal Civil Service Retirement Fund;
shifting the obligation to pay for military service retirement
from the Postal Service to the Treasury Department; giving the
Postal Service the ability to open and close processing plants
and post offices to meet their business demands; and enabling
the Postal Service to use pricing and other services as tools
to grow their business.
In my opinion, this last point will be the most important
in the long run. You must give the Postal Service the
flexibility it needs to compete in the current world. The
biggest current threat to the Postal Service is the shift from
physical to electronic mail delivery. First class and standard
mail are under attack and mail volumes are projected to decline
in future years. The Postal Service must grow the volume of
mail, and the only way to do that is to be competitive in
today's business world.
The current structure of the Postal Service represents the
competitive forces of the era when man first set foot on the
moon. The structure has been successful for 30 years, but the
world has changed and the Postal Service must change to
survive.
So what does it mean to be flexible and competitive in
today's world? I can think of one example that dramatically
illustrates how the Postal Service is stuck in another era and
how they can change to increase their mail volume. Cuddledown
buys goods and services from hundreds of suppliers, yet the
only supplier that does not extend us open credit terms is the
U.S. Postal Service.
Trade credit is the lubrication that keeps the business
world running and growing. The Postal Service needs to compete
in the modern business world, and yet their terms are cash in
advance as if their customer had no other choice. This policy
is straight out of the 1960's, at a time when EZ-PASS was
science fiction and trying to use your BankAmericard at the
grocery store would have been met with polite refusals, at
best.
Cuddledown mails catalogs 18 times each year. The postage
is removed electronically from our corporate checking account
on Friday. The catalogs begin to move on Monday and begin
arriving in our customers' homes the following Monday. Our
average catalog is delivered 12 days after payment has been
made. The only competitive part of this process is the
electronic debit to our bank account, and that is ironic
because it saves us the postage cost of mailing our check.
[Laughter.]
UPS, FedEx, and Parcel Direct all give us open terms. Our
printer, color separator, photographers, and models all give us
trade credit. When we buy down or fabric to make our down
comforters, we have standard payment terms. When we sell our
comforters, pillows, and sheets to other retail stores, we
extend them standard credit terms. I can even think of a guy
from China who sells us down-filled booties. We meet with him
in Germany. He has never been to Maine, much less visited us at
our factory, and yet he is willing to give us trade credit.
Trade credit is reasonable, it is controllable, and it is
expected in today's world, yet the Postal Service still
requires their customers to pay in advance.
So why should you give the Postal Service the ability to
extend normal trade credit? Because they could use it to grow
their volume. Paying in advance and waiting 12 days for your
first results is a roadblock for any business and especially a
small business. Cash flow is critical for a business, and many
decisions, especially the question of how many pieces to mail,
revolve around the impact on cash flow. If commercial mailers
could match the timing of their postage payments with the
delivery of their mail, they could mail more volume and they
would.
Would trade credit result in significant bad debt expense
for the Postal Service? I don't think so. The last supplier
that a mailer would fail to pay would be the Postal Service
because they would cut off its source of cash. It would be like
failing to pay your phone bill. It is just not done by a mail
order company.
The Postal Service could easily control their expense and
the marginal cost of mail delivery is low, so the risk of bad
debt is low. The risk is low, the reward is great, and the very
survival of the Postal Service depends on new ideas that will
reverse its declining mail volume.
Extending trade credit is just one idea that will help the
Postal Service compete and thrive in today's world. There are
probably many others out there, and the important thing is that
new legislation is passed that will enable the Postal Service
to take advantage of the opportunities that are available to
it. The business climate in the United States requires constant
creativity and innovation just to survive. The legislation that
formed the Postal Service in 1960 served it well for many
years, but now that same structure is a threat to its very
survival. Electronic communication has irreversibly changed the
postal world and it is up to Congress to create new structure
that will allow the Postal Service to serve its mission for the
next 30 years.
Thank you. I appreciate being invited today and having the
time to talk.
Chairman Collins. Thank you. Mr. Heath.
TESTIMONY OF MAX HEATH,\1\ VICE PRESIDENT, LANDMARK COMMUNITY
NEWSPAPERS, INC., ON BEHALF OF THE NATIONAL NEWSPAPER
ASSOCIATION
Mr. Heath. Thank you, Madam Chairman and Members of the
Committee. My name is Max Heath. If I may, I will speak briefly
today and submit a longer statement for your record.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Heath with an attachment appears
in the Appendix on page 85.
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Chairman Collins. Without objection.
Mr. Heath. I am Chairman of the National Newspaper
Association's Postal Committee and I am a Vice President of
Landmark Community Newspapers, Inc., a private company operated
out of Shelbyville, Kentucky. As the Chairman said, we own 53
small newspapers, 34 related shoppers, about 25 related
specialty publications, and 19 printing plants which both print
on newsprint and mail publications for other people, including
our own newspapers, and these are all across the country. I
also serve as one of two NNA representatives on the Mailers
Technical Advisory Committee formed by the Postmaster General
about 35 years ago now, I believe, and have been on that since
1989.
NNA supports postal reform and has worked for the past
decade to help craft legislation that will provide the Postal
Service with new tools to remain viable in this century while
protecting the interest of small newspapers. NNA has about
2,500 member newspapers in America. I bring greetings from many
of the publishers in your State, including, Madam Chairman, the
publisher of the Ellsworth American, Alan Baker, who you know
well, who is a member of NNA's Board of Directors and who is a
firm supporter of NNA's excellent relationship with the Postal
Service. Also in Senator Carper's State we have Tom Bradley,
the President of the Chesapeake Newspaper that operates in
Maryland and Delaware, former NNA President.
I would also like to insert here a point about the recycled
content on the record, since that was brought up earlier, if I
may. Newspapers are about 60 percent users of recycled
newsprint and all the mills that we operate now include post-
consumer content in that fiber that we buy. One thing we have
learned as the States have tried to put in local laws to govern
the use of this is that you can't recycle forever. You always
have to have some new fiber coming in because the fiber does
wear out, so there is not such a thing as 100 percent newsprint
recycled.
The typical member of NNA is a family-owned weekly of about
3,000 to 7,000 circulation. Almost all of these depend upon
periodical mail for their primary circulation and often use
standard mail to deliver advertising to non-subscribers To
illustrate, my company in 2003 spent $3 million in standard
mail postage, $2 million in periodical postage, and only four-
tenths of a million in first class postage for our total of
$5.4 million postage bill.
The membership of NNA also includes a number of small
dailies, most of which are under 10,000 circulation and many of
which are heavy mail users. In fact, we even have small dailies
that continue to depend upon the Postal Service for the primary
delivery of each daily issue. I have consulted with some of
those States, such as Michigan and other places.
I have provided postal consulting services through my NNA
hat and in my Landmark position for nearly 20 years now and
have also visited and seen newspapers in other countries. What
is remarkable to me is the wide diversity and importance of the
community press in America, compared to some other countries
where there are one or two major national newspapers and
possibly some smaller dailies.
I think the critical element in this country for the
hometown newspaper has been the Postal Service. Because of it,
just about every county seat has its own newspaper and some of
them have two or more even. Our Nation depends upon those
papers to deliver information on local government and politics,
including many of your local newspaper columns, and community
activities. Even in an Internet age, we think there is no
viable substitute for these newspapers. Community newspapers
are continuing to grow in this country in total circulation
even as metro papers, large State papers are on somewhat of a
decline in the last 10 or 15 years.
Congress ensured that we would have a thriving community
press in the 19th Century when it developed postal rates that
were designed precisely to give the new frontier its own local
newspapers. The large New York dailies were mailing heavily
into the developing South and West and Congress sought to
provide that a local publisher could successfully compete by
providing favorable rates.
Because those favorable rates had to ratchet up to cover
the full direct and indirect cost of delivery in 1970, our
publishers have experienced dramatic rate shock. Even with the
largest of work sharing discounts available now, our within-
county rates have gone up more than 850 percent since postal
reorganization, and at the basic level rate, there is a more
than 2,000 percent increase.
In 1993, Congress put a ceiling on the contribution of our
postage to the Postal Service's overhead cost, pegging it to
the outside county periodicals rate. In the past few years, we
have exceeded the ceiling. For example, in the 2002 Postal
Service cost and revenue reports, we contributed 102.2 percent
of our cost while outside county mail contributed 90.6 percent.
The report demonstrates that our mail is not inefficient or
unprofitable to the Postal Service. It does show a small
profit. But it does require some extra work on our part and on
the part of you and the Postal Service to ensure that we remain
viable. Because our costs are so small and our mail is such a
small part of the domestic mail stream, we sometimes become
lost in the shuffle.
So that brings me to my first request of the Committee. As
your work continues, we hope you will make sure that our
newspaper mail remains a distinct class within the mail stream
and is not swallowed up by larger, more costly mail class.
My second request addresses the Postal Service's need for
more flexibility in managing its business. We agree with the
need to provide the Postmaster General more management control.
This includes more flexibility in dealing with labor and
capturing automation savings.
We have a concern with the recent trend toward negotiated
service agreements, however. While we do not oppose them
outright, we think they should be based upon work sharing
partnerships, and if they are, we think niche classifications
are a far preferred tool, something that can be enjoyed by a
wider class of mailers and not just one large company.
We have consistently stated through postal reform
discussions that NSAs that are crafted primarily upon volume-
based incentives are unwise and are unfair in particular to
small mailers. Even though NSAs may be extended to other
mailers that are similarly situated, a small mailer may find a
massive NSA competitor in his market and be unable to qualify
for precisely the same sort of NSA.
Therefore, we have urged the Postal Service and the Postal
Rate Commission to require these NSAs to be sufficiently
specific in their details and sufficiently open ended that a
small mailer could request to perform the portions of the
larger NSA that it is able to do and to earn proportionately
similar discounts. We will make the same request of this
Committee as it drafts legislation. We believe that if you
leave this portion out of postal reform, the eventual NSAs may
force small volume mailers out of the mail stream or even out
of business, and the Postal Service will be the net loser due
to the law of unintended consequences.
There are a number of recommendations of the President's
Commission with which we heartily agree. We certainly agree
that continued reform of the Postal Service's Civil Service
Retirement System contributions is needed. We supported passage
of P.L. 108-18. We appreciate your work on that. We were
dismayed by the addition of a burden for military pensions,
like you have heard from many others. We can find no
justification for this burden. No other government agency bears
it and no private corporation, of course, has to contribute to
military pensions.
Although the Postal Service is a hybrid of government and
private, one would certainly assume that its obligations in
this area would be similar to one of those two, and in this
case, it is like neither one. We strongly urge that the escrow
of payments in 2006 be ended and a plan worked out for using
the savings of lower CSRS payments.
We are also agreed that the Postal Service should be
permitted to right-size its network. It may be surprising to
some to hear me, the champion of small rural newspapers, agree
that closing some postal facilities may be necessary. Yet I
think it is time to give the Postmaster General the ability to
decide how many facilities he needs. There are some situations
where very small post offices and even processing plants will
still be needed for universal service. I think he understands
that and that his strategic changes will be sensitive to the
many needs of communities.
No one likes to lose jobs or facilities in their areas, and
certainly not newspapers. But I think we all recognize that
some change is going to be needed to keep the Postal Service
viable, and I am willing to give the Postmaster General a
chance to make some adjustments. If service standards are
established and observed, I think he has the right to figure
out how to achieve them. If he guesses wrong, Congress always
has the ability to step in, and we will certainly be there
letting him know at the quarterly meetings.
In the end, Madam Chairman, I think we all are going to
have to make some adjustments to keep the Postal Service
viable. We appreciate the work that you and your Committee are
doing and we look forward to assisting you as you develop this
legislation to provide America with a sound Postal Service in
the 21st Century.
Chairman Collins. Thank you, Mr. Heath. Mr. Ihle.
TESTIMONY OF WILLIAM J. IHLE,\1\ SENIOR VICE PRESIDENT,
CORPORATE RELATIONS, BEAR CREEK CORPORATION
Mr. Ihle. Thank you, Chairman Collins and Members of the
Committee for providing the leadership that we so desperately
need to reform the U.S. Postal Service. I am Bill Ihle and a
Senior Vice President of Corporate Relations. I am here today
on behalf of our companies owned by Bear Creek Corporation,
Harry & David and Jackson & Perkins.
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\1\ The prepared statement of Mr. Ihle appears in the Appendix on
page 97.
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Bear Creek is an active supporter of the Postal Service.
Our CEO is an active member of the Direct Marketing Association
and appreciated the invitation to be here today. However, she
is planning Christmas already for Harry & David and was unable
to make it, so I am here in her stead. Our Senior Vice
President and General Manager of Customer Operations is Vice
President of the Parcel Shippers Association and we are active
in other industry associations.
Harry & David is recognized as America's largest shipper of
gourmet foods, fruits, fine chocolates, and baked goods.
Hopefully you have enjoyed our Fruit of the Month Club. Maybe a
Royal Riviera pear or the always wonderful ``Moose Munch.'' At
this time of year, it is particularly popular.
Jackson & Perkins is the Nation's largest garden and rose
company outside of Bakersfield, California. We grow 9.8 million
roses, and I might say also, 3 years ago, Harry & David and
Jackson & Perkins received the U.S. Conference of Mayors awards
for small companies for their recycling efforts, something we
are quite proud of.
We employ more than 2,000 people year-round and 8,000
additional employees in cities such as Medford, Oregon, and in
Newark, Ohio. We have call centers there. We have our
distribution centers there. We have warehouses, and we have our
executive offices.
We use all classes of mail to communicate with our
customers, but our success ultimately depends on accurate, on-
time, affordable package delivery, and the U.S. Postal Service
is our primary resource for this task. Frankly, our companies
would likely perish without affordable U.S. Postal Service that
offers universal service and stands ready to deliver our
packages to every city, every village, every hamlet, and yes,
that includes Caribou, Maine.
We agree with the President's Commission that the service
models will not work in the future and we agree with many of
its recommendations. We are pleased that the bills your
Committee and the House Committee has considered before, S.
1285 and H.R. 4970, are consistent with those recommendations
and we believe that they would largely get the job done. We
must emphasize how important it is that both bills confirm the
mission of the Postal Service, the physical delivery of
letters, printed matter, and packages, and we hope a lot of
Harry & David packages along the way. We believe that both
bills will also support the principles the administration says
should govern reform, best government practices,
transparencies, flexibility, accountability, and self-
financing.
Consistent with those principles, we think that there are
more specific criteria that reform should guarantee--
continuance of universal service; greater flexibility in the
Postal Service's ability to fix prices and services; the
deregulation of competitive products, such as parcel post,
Priority Mail, Express Mail, so that the market will govern the
prices and services; right-sizing the Postal Service
infrastructure, redefining the regulatory regime to ensure that
the Postal Service is performing its mission and that it
ensures transparent operation, financial controls, and the fair
and equitable rate structure; adequate compensation for postal
employees at all levels in order to attract top-level employees
and to give them the proper incentives; and end escrow of the
CSRS savings and correct the military service credit situation.
I would like to address two of these principles more
specifically, the core service and increased competition for
package delivery.
We agree with the President's Commission that the Postal
Service continue as a public service with a universal service
obligation that package delivery should continue to be the core
function of the U.S. Postal Service. For more than a century,
package delivery has been an essential and integral part of
what the Postal Service does. The fact that private sector
companies have been successful in the parcel delivery business
in no way alters the necessity of keeping the Postal Service in
that business to ensure that there will be competition.
We could not support any reform that would cut the Postal
Service from the package delivery business because we believe
that would end the universal service that our companies have
come to depend upon. I repeat, of particular importance to us
is 6-day affordable, universal, reliable package delivery
service. There is no reason given the existence of competition
for package delivery service to require the Postal Service to
seek advance approval from regulators of its rates and
practices as long as those rates and practices do not amount to
unfair competition and cross-subsidy. Without the Postal
Service, there simply would not be competition.
Moreover, the Postal Service provides a unique service.
Only the U.S. Postal Service provides truly universal parcel
delivery service--post office boxes, A.P.O., F.P.O., Alaska,
and Saturday delivery to just name a few examples. It does not
impose a surcharge on residential delivery and does not compel
the ordinary citizen to pay hefty charges or go to a franchisee
in order to send a single package. In fact, the Postal
Service's competitors hand packages over to the Postal Service
for delivery that they find inconvenient, difficult, or too
costly. The USPS does not do that. It is the carrier of last
resort. It goes the final mile virtually every time.
Naturally, we want as many competitors for our delivery
service as possible. At the same time, we understand the need
for a level playing field. It is not in our long-term interest
for any of the vendors who provide our transportation service
to have an unfair advantage over others because that will soon
end in a recentralization and monopolization of that service.
We are pleased that S. 1285 and H.R. 4970 protect against
cross-subsidization and competitive products and strike the
right balance.
The Postal Service is living on borrowed time. Were it not
for the efficiencies the current Postmaster General and his
dedicated staff have been able to achieve and the one-time
savings from the temporary fix of the CSRS, the Postal Service
would already be in crisis. A few nay-sayers should not be
allowed to stand in the way of the perseverance of this
indisputable public service, a universal Postal Service.
I thank you for your consideration and would welcome
further questions on how our companies are so dependent upon
the Postal Service and our further thoughts on how to reform
the future of the postal companies.
Chairman Collins. Thank you. Ms. Dreifuss.
TESTIMONY OF SHELLEY DREIFUSS,\1\ DIRECTOR, OFFICE OF THE
CONSUMER ADVOCATE, POSTAL RATE COMMISSION
Ms. Dreifuss. Chairman Collins, thank you very much for
allowing me to testify today on behalf of consumers and small
businesses. It is an honor and privilege to share my views with
you today.
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\1\ The prepared statement of Ms. Dreifuss appears in the Appendix
on page 107.
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Postal legislation of 1970 explicitly provided for a
representative to protect the interests of consumers and small
businesses when postal rates were to be changed and new classes
and services established. This continues to be a vital need
today. I ask that you and your Committee explicitly provide for
a Consumer Advocate in postal reform legislation that is
presently under consideration.
Mail to and from consumers and small businesses comprises
the vast majority of the postal mail stream, approximately 80
percent of postal volume. Yet the individual usage of mail is
relatively small on a per household basis. Individual mailers
spend an average of $7 per month on postage. This amount is too
small a percentage of a typical household budget to spur
individual mailers to intervene in postal rate and
classification proceedings. This holds true for small
businesses, as well, those that spend a fairly small percentage
of their budgets on postage.
Without an independent Consumer Advocate to litigate on
behalf of small volume mailers, the needs and concerns of small
volume mailers will rarely come to the attention of a postal
regulator.
Large businesses, particularly those that regularly spend a
sizeable percentage of their budgets on postage, find it in
their economic interest to intervene on an individual company
basis or as part of an association. They direct their energies
and resources toward developing an evidentiary record that
shows the effect of rate increases on their businesses. Without
a consumer/small business advocate, the evidentiary record is
unbalanced and incomplete. Evidence of the impact of rate
increases on consumers and small businesses must also be
brought to the attention of the postal regulator through the
intercession of a Consumer Advocate.
My office has represented consumer and small business
interests for 34 years and has achieved a long string of
victories on their behalf. I would like these protections and
successes to be carried forward in the new era of postal
legislative reform.
The two main objectives of consumers and small business
mailers are the same today as they were 34 years ago. They need
high quality, reliable services at low prices. I must caution
that the mechanisms that are intended to produce downward
pressure on costs may have a corresponding tendency to produce
downward pressure on service quality. For that reason, I
endorse new mechanisms that will establish and maintain high
levels of service performance at the same time costs are being
controlled.
A high level of postal services can be established by
giving the Postal Regulatory Board the duty and power to
establish service standards for every postal product and
service. The consumer representative should be explicitly
designated by statute to intervene in such proceedings.
High quality postal services will be maintained by giving
the Postal Regulatory Board the power to order the collection
and reporting of detailed information on how well the Postal
Service is meeting the service standards established by the
Board. The Consumer Advocate should be given the power to file
complaints when service falls below minimum standards.
To protect consumers and small businesses from a
disproportionate share of increases in postage, I ask this
distinguished group to explicitly provide for a consumer
representative in the baseline postage rate increase case that
is planned to launch the new system of price controls. I also
ask that the consumer representative be designated to
participate in future postal rate and classification
proceedings so that no changes can be made without specific
consideration of consumer impact.
Consumers and small businesses will be one of the major
sources of funding for universal service. I do not think it
advisable to shrink over time the base of mailers who fund
universal service. I am concerned about a recommendation that
would produce this situation by shrinking the postal monopoly.
As the captive customer base shrinks, there will be fewer and
fewer mailers contributing to the expenses of universal service
and the fixed costs of the Postal Service. The prices that they
pay will necessarily grow larger and larger over time because
their share of fixed costs will grow larger. It is a
mathematical law that cannot be escaped. Therefore, I recommend
against a narrowing of the monopoly in proposed legislation.
Again, many thanks for the great privilege of allowing me
to testify this morning and I would be very happy to answer any
questions you may have.
Chairman Collins. Thank you for your testimony.
Mr. Bradley, you mentioned in your testimony that the 8
percent rate increase that occurred in June 2002 meant for your
company an increase in your postal bill of $240,000 and you
equated that to being equal to eight good-paying jobs in Maine.
Is there a particular problem for catalog companies when postal
rates go up unexpectedly in view of your inability to adjust
costs? In other words, I assume a catalog company sets the
prices in advance. You are printing catalogs way in advance,
and if you have to endure a postal rate increase in the
interim, you can't adjust your prices to recover those costs.
Is that part of the problem?
Mr. Bradley. That is certainly part of the problem. The
inability to adjust quickly is always inherent in the catalog
industry because right now, we are working on the holidays and
we are actually working on probably 2005 right now. We don't
set our prices that far in advance, but we are very inflexible
once we get close to a date. So it is very difficult to adjust.
Also, we are not charging for the catalog. It is sent out
free as a form of advertising. So we have to raise the prices
of our products if we are going to cope with an increase in
postage, and we are in competition with every other form of
commerce in the United States. So for us to just increase
prices because we have an increase of cost doesn't really work.
I mentioned eight jobs just to give a benchmark of what
that would mean. You are really looking at cutting costs too,
all things being equal, so you try to raise a little bit, cut a
little bit, and try to survive. In an environment like we had,
when we had three postage increases in less than 2 years, I
think more like 18 months, that was a very difficult time
because your costs are going up and there is just really no way
to pass that on effectively and efficiently and competitively
to your customers.
Chairman Collins. So if anything, the current system forces
you to look at reducing jobs because if you are coping with
three price increases from the Postal Service in an 18-month
period, you cannot recoup those costs through adjustments in
your product prices, both because catalogs may already be
printed, but also because you are in a competitive market, is
that correct?
Mr. Bradley. Right. You can't raise the price of your
products just because one of your costs has gone up unless that
applies to everybody out in the retail world. Catalog and
Internet, home shopping all combined, they are probably only
about 15 percent of sales for our product categories in the
United States. So you have got 85 percent of the sales
occurring in retail stores and that is where your competition
is. You have to pay attention to the competitive environment
for pricing your product.
Chairman Collins. Mr. Heath, many mailers have criticized
the current 18-month rate setting process as being too
adversarial, too expensive, too time consuming. We heard Ms.
Moore from Time magazine say that she spends $1 million in
intervening in the average rate proceeding.
Consequently, the Commission and many other experts have
recommended streamlining that whole process. Are you concerned
that that would limit your ability as a stakeholder, as someone
who is very affected by the outcome of the rate proceedings, if
we move to the kind of system recommended by the Commission? Is
there a trade-off for you that is worth it?
Mr. Heath. I don't think we object to that because we don't
have $1 million to spend, so we don't spend it, but $100,000 or
so for our association to defend the situation. It is so drawn
out and there are so many economic discovery issues that have
to come up that if there could be ways to implement a shorter
process and look at rate bands that are held below the cost of
inflation, I think we supported some of those concepts and
still will. So I think an abbreviated process is certainly in
the interest of everybody in the mailing community and we don't
have any objection to that.
Chairman Collins. Mr. Ihle, do you agree with that?
Mr. Ihle. Yes. When we went through the postal increase, it
cost us $8 million last year, not last year but the year before
last when it went through. That had to come from somewhere. The
catalogs are already preprinted. Our big expense is, it is not
so much shipping out the catalogs, it is the parcels. If you
already have your rate structure set in the catalog and the
pricing, then all of a sudden in the middle of the year you get
$8 million, that can be the difference between a good year and
not a good year.
It is a horrible shock to come in the middle of the year.
You think you are on track. You think the year is going to be
good. Consumers are responding. And then all of a sudden you
get a bill for $8 million. That is a tough run.
Chairman Collins. Ms. Dreifuss, the current rate setting
process is adversarial in nature. It is very expensive and it
takes too long. But you raised an interesting point this
morning and that is that your office is able to intervene in
the process to make sure that voices that might not otherwise
be heard--small businesses, individual consumers--are
represented. If we give the Postal Service the authority to set
its own rates within a cap, how would we ensure that the
important voices of consumers and small companies are heard in
the process?
Ms. Dreifuss. One very important measure you could take
would be to make sure that there is consumer representation in
that baseline case that starts the price cap system. In that
way, we would make sure in the baseline case that all first
class rates, Priority Mail, Express Mail, special services,
that they are set in the proper relation to everyone else's
rates.
Now, in the future, I think it is possible--no one would
like to see this happen, but it may be possible even under a
system of price caps that the Postal Service will sometimes
even be unable to live within the price cap. I don't know if
legislation will provide for still further increases, but
certainly if there were to be such increases, I would very much
like to have a consumer representative there to make sure that
a disproportionate share isn't shifted onto the backs of the
captive customer.
Chairman Collins. So you see that baseline case that is
going to be used to establish the cap as a way to ensure the
involvement of your office on behalf of small businesses and
individual consumers?
Ms. Dreifuss. Indeed, and I would hope to the extent that
there will be future rate, classification, and service
proceedings, even under our new regime of postal activity, that
there would also be a consumer representative in those
proceedings, as well.
Chairman Collins. Mr. Bradley, the General Accounting
Office has criticized the Postal Service in many reports for
not having transparency and accountability in its financial
statements, that it is very difficult to figure out exactly
what is going on, whether cross-subsidization is occurring,
whether or not the Postal Service costs are fully accounted
for. If we are going to give the Postal Service more authority
to set its own rates, does that need to be accompanied by new
requirements to ensure that there is transparency in the
financial reporting of the Postal Service?
Mr. Bradley. I am not a student of the Postal Service and
certainly the accounting of the Postal Service, but it would
seem that it would be essential that you would have
transparency in looking at the financial performance and being
able to segregate different classes of mail and evaluating the
specific costs of those classes of mail and being able to
attach rates based on that. I think it seems essential.
Chairman Collins. Mr. Heath, do you have any comment on
that?
Mr. Heath. Well, we, too, like other associations and
mailers, at times have had difficulty getting what we consider
to be accurate information or sometimes information at all
regarding the particular issues that we are trying to work with
in a rate case. We cite in our testimony a problem that
happened in the 1994 rate case where they came out with a 35
percent increase in in-county rates and when they got through
refiguring their numbers, it was actually a negative 1.5
percent, so quite a big difference there.
So especially with measurement of in-county volume and in-
county costs, being the small class it is, we have a lot of
concern about some of those issues and certainly we support any
efforts that could be made to have better data and have that
better data more shared and more shared on a regular basis
between rate cases, not just in discovery and having to beg and
borrow and subpoena. But if subpoena power needs to be there,
we support that.
Chairman Collins. Mr. Ihle.
Mr. Ihle. Transparency is essential, Senator.
Chairman Collins. Ms. Dreifuss.
Ms. Dreifuss. Chairman Collins, I think in order to make a
greatly reduced rate case, a streamlined rate case work, it is
absolutely essential that the Postal Regulatory Board have the
power to require the Postal Service to collect and report the
data that would be necessary to move forward quickly in the
case. In that way, the public will be well informed about the
Postal Service's costs, revenues, and volumes before the case
ever begins.
Chairman Collins. Thank you. Senator Carper.
Senator Carper. Thanks very much.
Ms. Dreifuss, I had to be in and out during your testimony.
Could you just take maybe one minute and just summarize very
briefly the heart of the thoughts that you would want me to
take out of here that you have conveyed?
Ms. Dreifuss. I am delighted, Senator, to do that. What I
said was that consumers and small businesses spend a very small
percentage of their budgets, of their household or business
budgets, on postage. Very large businesses and in particular
those large businesses whose budgets have a very sizeable
percentage of postage as being one of their expense items--Time
Inc., for example--I want to make a contrast here that large
businesses or businesses that have a sizeable percentage of
their budgets on postage do intervene in proceedings. It is in
their economic interest to do so. However, by contrast,
consumers and small businesses, with their small involvement in
postage, don't.
And that is why I think we need to have a Consumer
Advocate. We have had one since 1970 and I would like to
continue to see a Consumer Advocate in the future.
Some of the other points were actually made in response to
Chairman Collins' question just now, and that, I think, covers
it pretty well.
Senator Carper. Good. Thanks very much.
Mr. Bradley, I think early in your comments you mentioned
that the U.S. Postal Service was barred from extending trade
credit to its customers. Did I hear you correctly? They are
barred?
Mr. Bradley. I am not aware of that policy being extended.
The point that I was making is that out of all the vendors,
hundreds of vendors that we deal with, and we are a fairly
small company, they are the only one that has no ability or
inclination to extend us simple payment terms, such as UPS,
FedEx, Parcel Direct would do. They do the service and we pay
really in conjunction with it being completed.
Senator Carper. I would ask any of the other panelists or
witnesses, are you aware of a legislative constraint that keeps
the Postal Service from negotiating trade credit? No? Let the
record show that a shaking of heads no, indicated no.
Mr. Heath, where are you from?
Mr. Heath. Kentucky.
Senator Carper. Whereabouts?
Mr. Heath. Shelbyville, just due east of Louisville. I am
formerly from Campbellsville down south.
Senator Carper. Do you know my mother? [Laughter.]
Mr. Heath. Well, I could. Where is she from?
Senator Carper. Actually, she lives right across the line
from Huntington in a little town called Ashland. My sister is
in a place just to the east of Lexington, a place called
Winchester.
Mr. Heath. Winchester, right, a beautiful little town.
Senator Carper. Keep an eye on them for me, if you would.
Mr. Heath. We will. [Laughter.]
Senator Carper. I want to go back to something that you
talked about, Mr. Heath. A couple of our witnesses have come
before us and talked about negotiating service agreements. I
believe you cautioned us about large volume customers being
able to negotiate those kinds of agreements, but smaller volume
customers not being able to.
In the legislation that I introduced last year, I think it
allows small mailers--relatively small mailers--whose business
is largely local to apply for negotiated service agreements. We
tried to make sure in that legislation that a small newspaper,
whether it is in Dover or Ashland or some other place, could
get a negotiated service agreement with the U.S. Postal Service
if a large mailer that they were competing with in Dover or
Ashland were able to get one. Would that be something we ought
to try to include in our final bill?
Mr. Heath. We are very sold on the concept of work sharing
and our association was involved in some of the very early work
sharing rates that went on in the early 1980's so that if you
presort your mail to certain levels and if you walk sequence it
to certain levels, you get better rates, if you enter it at the
office of delivery, like many of our publications do, both for
newspapers and advertising mail.
So we don't quite understand why there can't be more niche
classifications that broaden the concept of work sharing to
more mailers. That is what we basically advocate and we sort of
stick with that. I suppose that if there is a way that this
similarly situated language that has been kicked around could
actually work--we haven't seen it work just yet. We sort of
believe in the concept, but we are not sure exactly how that is
going to end up working in the final analysis.
We just believe that if we do the same amount of work to
get a piece of mail to an additional location than some
competitor, or the same location as some competitor in some
places, that we should have basically the same rates for it. We
send out a lot of ad mail just like, for instance, Adville
Systems does that serves our preprint customers going right
down to the carrier route and we don't necessarily think, or,
in fact, we don't think that just because they happen to enter
so many billion pieces a year and we may enter a few hundred
thousand, if we are doing the exact same level of work entered
at that delivery office that we should have any less rate than
they do. So that is why we feel the parity issue is very
important.
Senator Carper. All right. Good. Thanks.
I would like just to talk a little bit or ask you to talk a
little bit about universal service, and I ask you to keep your
responses brief so everybody can have a shot at this. What do
you believe universal service to be? Do you think it is fully
defined in current law or adequately defined in current law?
How do you envision universal service changing in coming years?
So it is a three-part question. What do you believe
universal service to be? Is it adequately defined in current
law? How do you see it changing in coming years? I don't care
who goes first. We could do it in alphabetical order, though.
[Laughter.]
Mr. Ihle. I will take it first. We believe that universal
service has to include package delivery. It has to be able to
go to not only big towns but small communities. It has to
include Saturday delivery. As we saw this year, I believe
Christmas Eve was on a Saturday this year. Being a cataloger,
and I suspect you feel the same way, that cutoff period where
you have to cut off the phone orders and the Internet orders,
for us it was, I think, December 19. That window in between the
19th and the 25th, the 24th for Christmas Eve, is a huge delta
for us. If we can have that Saturday delivery and it happens to
fall in that period of time, that is a huge incentive for us.
It has to include packages and it must include Saturday.
Senator Carper. Thank you. Others, please?
Mr. Heath. We, too, in the newspaper business still feel
that 6-day delivery is important. Many of our members use
Saturday for delivery of newspaper issues and shopping
advertisement material.
To us, universal delivery sort of increasingly seems to
mean access to the full range of products and services that the
Postal Service has. We are concerned, for instance, that the
Postal Service had difficulty dealing with automation of our
newspapers and we wanted to play, and we worked with a lot of
work groups to play in that arena and make sure we are
participating, and yet the machines too often are built maybe
not to include the widest possible range of materials that need
to go through them. So we can be part of this cost savings that
needs to go on in automation.
So to us, universal service means to not leave outside the
best and most efficient part of the mail stream products that
are very essential to local subscribers and to people all
across the country, snowbirds and so forth. Many of our
products go South for the winter and we have a lot of
difficulty with that.
So we are trying to view it a little bit as how accessible
the whole system is and how much we want to be a part of the
best, most efficient part of that mail stream. That is kind of
an important issue for us.
Senator Carper. Thank you, sir. Ms. Dreifuss.
Ms. Dreifuss. I would be happy to go next. I think
universal service means giving the public access to a Postal
Service, a Governmental Postal Service, that will accept
letters, packages, periodicals, and make delivery of those
items to every home and business in the United States. I think
it includes 6-day delivery.
One point I want to stress that is often overlooked,
everyone seems to accept that--and businesses in particular
would like to have delivery made to every home and business in
the United States. But I don't want anyone to forget that in
States like Maine, and I am sure many parts of Delaware, it is
necessary for consumers and small business people to have ready
retail access to these services. So I do think that should be
part of the definition.
Senator Carper. OK. Thank you.
Mr. Bradley, the last word.
Mr. Bradley. Universal service, I think to me is similar to
what Ms. Dreifuss said, access throughout the whole country. I
see the Postal Service as being responsible for what is termed
as the last mile, being able to go to every home and business
in the country.
I personally am not sold on 6-day delivery. I may buck the
trend. I don't know what the Postal Service would----
Senator Carper. Do you want seven? [Laughter.]
Mr. Bradley. No, I was thinking five, but I am not sure
what they would do with the mail on that other day.
Logistically, I don't see how you could avoid Saturday
delivery. I think the mail would logistically have to move on
that day.
But I think that the Postal Service is in that unique
position and has that unique responsibility of going that last
mile and is responsible for that and work sharing with others,
such as FedEx going and being dropped off to the Postal Service
to be delivered that last mile, those are all very appropriate.
Senator Carper. Good. Those are helpful responses and we
appreciate each of them and we appreciate your being here.
Thank you for contributing to our deliberations and we look
forward to taking your thoughts into consideration when we try
to mark this bill up. Thanks so much. Thank you, Madam
Chairman.
Chairman Collins. Thank you, Senator Carper.
I want to end this morning by emphasizing a point that Mr.
Ihle made, and that is that it is only the Postal Service that
provides 6-day-a-week delivery of mail to every address at a
uniform rate, what Mr. Bradley referred to as delivery to that
last mile. I think as we craft a postal reform bill, we need to
remember that.
At our next hearing on Thursday, we will hear from two of
the Postal Service's competitors, Federal Express and UPS, and
I look forward to hearing their views on this issue, as well.
I very much appreciate the testimony of all of our
witnesses today. Your insights have been very valuable to us.
You represent a real range of entities affected by the Postal
Service. We are going to continue to work on this issue and we
would welcome your advice and input as Senator Carper and I sit
down at the end of these hearings to draft a bill.
The hearing record will remain open for 15 days for the
submission of any additional materials that our witnesses or
others may have.
This hearing is now adjourned.
[Whereupon, at 11:54 a.m., the Committee was adjourned.]
POSTAL REFORM: SUSTAINING THE 9 MILLION JOBS IN THE $900 BILLION
MAILING INDUSTRY
----------
THURSDAY, MARCH 11, 2004
U.S. Senate,
Committee on Governmental Affairs,
Washington, DC.
The Committee met, pursuant to notice, at 9:30 a.m., in
room SD-342, Dirksen Senate Office Building, Hon. Susan M.
Collins, Chairman of the Committee, presiding.
Present: Senators Collins, Stevens, Voinovich, Carper, and
Pryor.
OPENING STATEMENT OF CHAIRMAN COLLINS
Chairman Collins. The Committee will come to order.
Good morning. Today marks the sixth in a series of hearings
the Governmental Affairs Committee is holding to review the
reforms recommended by the Presidential Commission on the
Postal Service. On Tuesday, the Committee heard from
representatives of the printing and magazine industries, small
catalogue retailers, weekly and daily newspapers, and the
Postal Rate Commission's Consumer Advocate. We discussed not
only the Commission's workforce and financial recommendations,
but also the Postal Service's mission and monopoly, the rate-
setting process, and corporate governance issues. Today we will
continue our focus on the mailing industry.
As our witnesses well know, the Postal Service is the
linchpin of a $900 billion mailing industry that employs 9
million Americans in fields as diverse as direct mailing,
printing, publishing, catalogue production, and paper
manufacturing. The health of the Postal Service, therefore, is
essential to thousands of companies and the millions that they
employ. It is vital that we in Congress, the Postal Service,
and the mailing industry work together to save and strengthen
this institution upon which so many Americans rely for
communication and for their jobs.
I welcome our witnesses today and look forward to hearing
their views and insights on the recommendations of the
Presidential Commission.
I would now like to welcome our first panel of witnesses.
Mike Eskew serves as the Chairman and Chief Executive Officer
of UPS, the world's largest package delivery company. Under Mr.
Eskew's direction, UPS is expanding its capabilities into new
lines of business that complement the company's global package
delivery operations. Prior to serving as Chairman and CEO, Mr.
Eskew served as both Executive Vice President and Vice
Chairman. He has served as a member of the UPS Board of
Directors since 1998.
Our second witness this morning is Fred Smith, who is the
Chairman, President, and Chief Executive Officer of FedEx
Corporation, a $23 billion global transportation and logistics
company. Mr. Smith provides strategic direction for all FedEx
Corporation operating companies, including FedEx Express, FedEx
Ground, FedEx Freight, etc. He founded FedEx in 1971. Today the
company serves over 214 countries and handles more than 5
million shipments each day.
We are very pleased to welcome you to the Committee. We
appreciate your both taking time to come in person, and, Mr.
Eskew, we will ask that you begin.
TESTIMONY OF MICHAEL L. ESKEW,\1\ CHAIRMAN AND CHIEF EXECUTIVE
OFFICER, UNITED PARCEL SERVICE
Mr. Eskew. Chairman Collins, good morning. I am Mike Eskew,
Chairman and Chief Executive Officer of UPS, and I am pleased
to be here today to testify on behalf of the men and women of
UPS on this important issue of postal reform. I have a written
statement that, with your permission, I would like to submit
for the record.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Eskew appears in the Appendix on
page 129.
---------------------------------------------------------------------------
Chairman Collins. It will be entered.
Mr. Eskew. And I will summarize that statement with just
some brief comments this morning.
Madam Chairman and Members of the Committee, I appreciate
your efforts on this important issue. The Postal Service is an
impressive organization and has some great things going for it:
Inspired leadership from Jack Potter and his team, incredible
dedication of the people in the field, and an infrastructure
designed to deliver core mail services that are second to none.
In the past, UPS and the Postal Service have been at odds
with respect to postal reform. However, more recently both
organizations have made great strides in trying to find common
ground on a number of issues. Many of our team from several
functions across UPS have gotten to know the Postal Service,
and Postmaster General Potter and his team have gotten to know
us. And these efforts have led to relationships that we hope
will continue to grow.
We think it is a credit to both organizations that we have
been able to meet with some level of success by working
together where it has been mutually beneficial. UPS is in an
interesting position with respect to the Postal Service. On the
one hand, we are large customer of theirs. We use the Postal
Service as our primary means of communication with our
employees, our shareholders, our customers, our vendors, and
others. UPS is responsible for over $230 million annually in
revenue to the Postal Service, and as I have said before, we
are now working together with them on a number of fronts. And,
on the other hand, we are perhaps one of the few companies in
the Fortune 500 that has the Federal Government competing in
our core market, the package delivery business. I believe there
is a path to postal reform that will enable the Postal Service
to continue to provide high-quality core mail services to
everyone in America. This path should include provisions that
ensure that the monopoly is not leveraged into the competitive
marketplace. Indeed, the Bush Administration highlighted this
concern when it issued its statement that any reform measure
must ensure that the Postal Service ``operates appropriately in
the competitive marketplace.''
The path to postal reform should focus on the following key
areas: A clear focus on core mail services; a strong, effective
regulator; cost control, cost management, proper cost
allocation, along with financial transparency; and, to the
extent that the Postal Service competes with the private
sector, it should be on a level playing field. I will elaborate
on those four.
First, reform should focus on core mail services provided
by the Postal Service: First-Class mail, standard mail, and
periodicals. These services provide the Postal Service with 99
percent of its annual volume, 86 percent of its annual revenue,
and covers 92 percent of the overhead cost of the organization.
Competitive products do not represent the way out of financial
troubles for the Postal Service. Electronic alternatives to
hard-copy mail pose a far greater threat to the Postal Service
than does competition from private delivery companies like
ours.
Second, because the Postal Service retains its statutory
monopoly, the public is best served by a strong, effective
regulator. Strong, up-front regulation is simply the price for
going to market with a statutory monopoly. I want to point out,
however, that I agree that the current rate-setting process is
in need of improvement. I do not believe, however, that
effective regulation and improvements to this process are
mutually exclusive.
Third, the Postal Service and the Postal Rate Commission
should have the tools needed to establish and maintain the
clear, transparent financial picture of the Postal Service.
Additionally, the Postal Service should continue to enhance its
focus on cost control and set up its efforts to proper cost
allocation to its various products.
Fourth, and finally, to the extent that the Postal Service
competes with the private sector, it should be on a level
playing field, and that the Postal Service should not leverage
its monopoly network into the competitive free enterprise
marketplace. Because core mail services cover nearly all of the
overhead costs of the Postal Service, competitive products
essentially get a free ride on the postal network. Neither UPS
nor any other private company has the benefit of a statutory
monopoly to cover the lion's share of its overhead cost. This
clearly represents an advantage to the Postal Service.
Additionally, the Postal Service enters the competitive
marketplace with other benefits associated with its government
status. It is exempt from many taxes and exempt from a number
of laws that apply to the private sector. Just last month, the
U.S. Supreme Court found in the case of U.S. Postal Service v.
Flamingo Industries that the Postal Service is indeed part of
the Federal Government and, therefore, it cannot be subject to
antitrust laws. In its decision, the Court stated that the
Postal Service has many powers more characteristic of
government than of private enterprise, including its state-
conferred monopoly on mail delivery.
To be fair, the Postal Service also has its burdens placed
on it as a result of its public mission that do not fall on
private sector companies. This fact is recognized by the
Supreme Court in the Flamingo case as well. These advantages
and the burdens should be recognized and reconciled.
I believe there is a path to reform that will accommodate
the Postal Service, its employees, its customers, and its
competitors. I look forward to working with you and your staff,
Madam Chairman and Members of the Committee, to ensure the
Postal Service remains strong and viable into the future.
Thanks so much, and I will be happy to take your questions
at the appropriate time.
Chairman Collins. Thank you very much for your testimony.
Before turning to Mr. Smith for his statement, I would like
to call on my colleague, Senator Voinovich, to see if he has
any opening statements he would like to make.
OPENING STATEMENT OF SENATOR VOINOVICH
Senator Voinovich. Thank you, Madam Chairman. It is a short
statement.
I want to thank you for continuing your thoughtful probe
into the recommendations made by the Presidential Commission. I
applaud your efforts to address this issue and for your
commitment to finding solutions in a bipartisan manner.
There is a bipartisan agreement that we need a strong,
viable Postal Service. Whether it is delivering needed supplies
to a business or a birthday card to someone's grandmother, the
Postal Service exists to serve the needs of every American.
Ohio is the home to significant urban areas, major U.S.
cities, including Cleveland, Columbus, Cincinnati, Toledo, and
Dayton. However, much of Ohio is rural, and for people who live
in rural areas, the Postal Service provides a vital
communication and economic link to the rest of Ohio, the
Nation, and, for that matter, the world. I know that rural
Ohioans were concerned that universal service, guaranteeing
affordable rates and frequent delivery, could be scaled back. I
am pleased that the Commission strongly endorsed continuing
this long-standing mission.
Ohio's business community has shared with me their support
for postal reform including RR Donnelley, which maintains a
large presence in Ohio, testified before this Committee on
Tuesday, and the American Greetings, which is headquartered in
Cleveland. But it is clear that the U.S. Postal Service faces
serious challenges. While it is impressive that the Postal
Service has reduced its level of indebtedness to the U.S.
Treasury from $11 billion in 2002 to $7 billion today, this is
still a significant amount. In addition, the Postal Service
carries approximately $48 billion in unfunded retiree health
benefits and about $6.5 billion for unfunded workers'
compensation benefits.
Furthermore, the Postal Service faces increased competition
not just from commercial firms like the gentlemen who are here
today and their companies, but also from rapidly expanding
technologies such as e-commerce and online bill paying.
In addition, we cannot ignore a new challenge facing the
Postal Service, and that is the challenge of securing our
Nation's mail. My colleagues and the entire congressional
community know this reality all too well after the horrific
anthrax attack in October 2001. We are still getting our mail 2
and 3 weeks late. I have to tell people to mail items to our
regional offices because of the process that mail must go
through here.
This tragedy was even more personal to the postal
community. I visited with postal employees in Toledo and
Cleveland after the anthrax attack to talk with them about
their fears and assure them that we would do what was necessary
to protect them. That is another burden the Postal Service
carries today, and I know we are working to try and make sure
that they are working in a secure environment.
Madam Chairman, I thank you for calling this hearing. I
thank the witnesses for their testimony before the Committee
today, and I look forward to continuing to hear the views from
our witnesses today. Thank you.
Chairman Collins. Thank you. Mr. Smith, would you proceed
with your statement?
TESTIMONY OF FREDERICK W. SMITH,\1\ CHAIRMAN, PRESIDENT, AND
CHIEF EXECUTIVE OFFICER, FEDEX CORPORATION
Mr. Smith. Thank you, Senator. I, too, have a written
statement which we have submitted to you, and I am going to
summarize it if that would be acceptable.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Smith appears in the Appendix on
page 138.
---------------------------------------------------------------------------
Chairman Collins. Without objection, all written statements
will be submitted in full.
Mr. Smith. Senator, on behalf of 245,000 members of the
FedEx team, we appreciate very much the opportunity to give you
our thoughts on this important issue.
FedEx supports the modernization and the transformation of
the U.S. Postal Service. We support S. 1285, which has been
proposed by Senator Carper, with some recommended amendments.
We urge further study in regard to developing a fundamental
transformation plan for the Postal Service for the future to
look at the pros and cons and the methods of turning the Postal
Service into a corporation owned by the government or by
private interests, and to determine the best method to unwind
the monopoly that the Postal Service enjoys by the end of 2008,
which is consistent with the European Union timetable, and in a
manner most suitable for the Postal Service.
Now, we are very familiar with the requirement to transform
a business. FedEx itself has been dramatically transformed over
the last few years from a largely domestic express
transportation company to a major diversified transportation
logistics and business service corporation.
The Postal Service is likewise at the proverbial fork in
the road. Its main income comes from letters, most of which
will eventually disappear. And as Peter Drucker has noted, we
are sort of like the 1820's, the same status in terms of the
Information Revolution as the Industrial Revolution was at that
time, so there is more change ahead.
So the basic choice for the government is relatively clear.
On the one hand, you can liquidate in an orderly manner or
close down the USPS as technology encroaches upon its primary
business. Or you can structure an entity that can compete.
Now, FedEx favors allowing the USPS to compete because at
the end of the day it is politically not feasible to simply
ignore three-quarters of a million U.S. citizens employed by
the Postal Service. And the management of such a decline and
liquidation would be extremely difficult. One only has to look
at the experience of Amtrak to see how difficult that truly is.
But none of that detracts from the issue that the Postal
Service needs fundamental transformation. I think it was best
summed up by David Walker, the Comptroller General of the
United States, when he stated that the ``incremental steps
toward postal transformation cannot resolve the fundamental and
systemic issues associated with the Service's current business
model.''
The Presidential Commission recommended making USPS into a
world-class business, but it should be obvious that the USPS
must first become a business before it can hope to become
world-class. A regulated government monopoly cannot become a
world-class business. We at FedEx certainly could not have
transformed ourselves into the entity that we are today had we
had a board of political appointees, regulated prices and
operations, and a monopoly. So serious study is needed of the
pros, cons, and options for transforming the USPS into a
corporation.
Likewise, the USPS cannot learn to compete unless it is
required to compete. A monopoly is dispiriting and enervating.
A serious quantitative plan to phase out by the end of 2008
should now be developed, in our opinion. Postponing repeal
beyond 2008 could delay EU reform to the detriment of U.S.
express and direct marketing companies. And I would just point
out in that regard, one of the serious concerns I know on the
part of FedEx, and I suspect on the part of the United Parcel
Service as well, are the European monopoly postal services who
have been allowed to come into private industry and use those
funds to help them compete against our operations.
FedEx would recommend an increase in USPS management
flexibility, much more flexibility in pricing of their
competitive products, an end of salary caps for executives to
ensure the best possible talent. We would like to see a ceiling
on the scope of the postal monopoly, say 12.5 ounces or 6 times
the stamp price, and divesting the USPS of the administration
of that monopoly because it is fundamentally unfair.
We favor firewalls, which is the term that Congressman
McHugh used over on the House side, to prevent unfair
competition, a separation of USPS accounts into non-competitive
and competitive, a required allocation of a reasonable level of
overhead cost to competitive products, an end of key legal
privileges for competitive products, such as the antitrust
exemption, an assumed Federal income tax on USPS competitive
product revenues.
We recommend strengthening the Postal Rate Commission,
giving it subpoena power, extension of jurisdiction to
international mail, annual oversight of rates, and increased
enforcement powers.
We recommend allowing the Treasury and USPS to create a
government corporation to handle the back office,
transportation, and sorting in a truly businesslike manner.
Such operations should be nonpolitical and performance based,
and a government-owned corporation working only for the USPS
would not pose competitive issues.
The monopoly reforms need to be refined in minor respects,
authorizing the Postal Rate Commission to adopt regulations
clarifying the scope of the postal monopoly, and exempting
outbound bulk international mail from the monopoly.
You should consider authorizing, in our opinion, the Postal
Rate Commission to phase in access to mailboxes in a controlled
manner that does not hurt the USPS or households.
And we think that you should adopt basic common-sense
guidelines for international postal policy. You should not
allow the USPS to charge less to deliver foreign mail than
American mail, except perhaps for correspondence from the very
poorest companies. And we recommend that you not allow the
UPU's Committee of Postal Officials to legislate international
regulations binding on the U.S. Government or courts.
And, finally, we recommend you exempt bulk business letters
from the requirement of a uniform rate for all letters, which
is about half of all letters. Universal service should be
preserved, but allowed to evolve with changing times. No
political or economic reason whatsoever, in our opinion,
remains to require uniform rate for bulk business mail, and we
recommend that you give the USPS maximum operational freedom
consistent with maintaining universal service.
That concludes my comments, Senator, and obviously I would
be happy to answer any questions that you might have.
Chairman Collins. Thank you very much.
Before turning to questions, I would like to call on my
colleague, Senator Carper, for any opening remarks that he may
have. As many observers are well aware, Senator Carper and I
have committed to joining together to draft a bipartisan postal
reform bill. We hope that bill will be enthusiastically
embraced by all of our colleagues.
Senator Carper. At least by George Voinovich. [Laughter.]
Chairman Collins. Senator Carper.
OPENING STATEMENT OF SENATOR CARPER
Senator Carper. Thanks very much.
Mr. Smith, I understand that when I was just about to walk
into the room, you said some supportive things about the
legislation that I introduced this past year, and maybe, Madam
Chairman, if Mr. Eskew comes in and supports it as well, we
could just go right to the markup on that bill.
Chairman Collins. I don't think so. [Laughter.]
Senator Carper. I didn't think I would get you on that.
Chairman Collins. Nice try.
Senator Carper. I have a statement for the record that I
would like to submit, and we are just delighted that you are
here. We have had, really, a series of excellent hearings, and
I think given the lineup that we have here today, we are going
to get a lot out of it, and I look forward to marking up the
Collins-Carper-Voinovich bill some time in the next couple of
weeks. Thank you.
Chairman Collins. That is right.
[The prepared statement of Senator Carper follows:]
PREPARED STATEMENT OF SENATOR CARPER
By all accounts, the Postal Service has been a success since its
creation. 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 thirty years after its birth,
the Postal Service is a key part of the nation's economy, delivering to
more than 200 million addresses and supporting a massive mailing
industry.
Even a casual observer, however, could see that the past few years
have not been easy for the Postal Service. As we learned earlier this
week, they have also been difficult for the private firms, large and
small, and the millions of mailing industry employees who depend on
stable postal rates.
I am pleased, then, that we have a once-in-a-generation opportunity
now to work in a bipartisan way to modernize the Postal Service and
update its business model for the 21st Century. Congress has been at
work on postal reform for nearly a decade now, mostly in the House
under the leadership of Congressman John McHugh from New York. This
year, however, I sense that we have some momentum that hasn't been
there in the past.
At the end of last year, President Bush issued a set of postal
reform principles focused on those recommendations from his postal
commission aimed at improving transparency and accountability at the
Postal Service and giving management the increased flexibility they
need to streamline operations and seek out new mail volume. His
principles touch on the main themes addresses in S. 1285, the
comprehensive postal reform legislation I introduced last June. S. 1285
itself was based in large part on the most recent postal reform bill
put forward by Congressman McHugh.
I think it's safe to say, then, as I've said before, that we
probably have agreement on 90 percent of what should be in a new postal
reform bill. Now that this committee's schedule of postal hearings is
nearly complete, I look forward to sitting down with you, Madam
Chairman, and all of our colleagues to begin putting that bill
together.
Chairman Collins. Thank you, Senator.
Thank you both for your testimony. As competitors of the
Postal Service, your views and experience are very important to
our deliberations as we review the Commission's recommendations
and sit down to draft a bill.
Mr. Eskew, during your presentation to the President's
Commission, you testified that the package delivery sector is
well served by private companies, and some observers felt that
you implied that the Postal Service should not compete in this
area. Some observers have felt that both UPS and FedEx's goal
is to get the Postal Service out of the package delivery
service.
Earlier this week, we heard from both small and large
retailers, for example, a small company in Maine called
Cuddledown, a larger company that owns Harry & David, who
testified before us that their companies could not exist
without the Postal Service, even if they are customers of yours
as well.
Would you please comment on the issue of whether UPS
believes the Postal Service should get out of the package
delivery business altogether?
Mr. Eskew. Yes, Madam Chairman. My comments to the
Commission was that philosophically we believe that the package
business in the United States is well served by the private
sector, and we think that this country was founded on the free
enterprise system that really has made it the envy of the world
in terms of the things that we do and the things that we bring
to market. And to the extent that we do service very well,
completely, the package business, we think philosophically that
the government does not need to be in there, that we serve the
needs of the public very well. Practically, they are in this
business. Mr. Smith talked about the 750,000 people. So we
think to the extent that they do compete in this business, it
needs to be on a level playing field, and that is what we have
practically been talking about. So that is the first part of
your question, I hope.
The second part, just to think about--I am not sure about
the small company in Maine or Harry & David's comments about
the Postal Service. But quite frankly, I would agree that the
Postal Service is absolutely necessary to be able to ship out
catalogues and bills and the things that we rely on them to do.
Also, we could not exist without a strong Postal Service. So to
that extent, I think that is real.
To the extent that they are talking about parcels, on the
other hand, though, we service all the State of Maine, from
Calais to Corea to Presque Isle to Greenville, and every
village, every town, every hamlet, every street in the United
States, and we do not stop at the mailbox. We go to the door.
We go to the porch. And there is an awful lot of these
customers that tell us, ``You're the only one to come to the
ranch,'' or ``You're the only one to come to the farm,'' in
parts of Ohio and Maine and in Delaware and all over the United
States. So we do service the whole country in terms of parcels.
Harry & David's parcels are heavy. They are pears, they are
apples, they are rosebushes. They do not fit in the mailbox.
And in those places where they do not fit in the mailbox, they
go back to the post office. A postcard may be left in the
mailbox, and the person would come to get them. We deliver them
all the way to the door. And if for some reason there is a
pricing differential, I think that is the whole competitive
landscape that I like to talk about in terms of level playing
field, because those heavy parcels are not part of the in-
trace, in-sequence part of what the letter carrier finds on his
tray with the next stop that fits nicely into the mailbox--and
should not carry any overhead burden. Those things require
overhead burden.
Chairman Collins. Doesn't UPS rely on the Postal Service
for the delivery of packages in certain areas?
Mr. Eskew. Madam Chairman, we have two million daily pickup
accounts in the United States, some infrequent, some every day.
We have two accounts, two of the two million, one per million,
that we have an experimental pilot program where we are using
the Postal Service to deliver about less than 20 percent of the
volume we pick up from those two accounts. Those two accounts'
packages fit in the mailbox, a place that we, as Mr. Smith
mentioned, do not have access to. If we could have access to
those mailboxes, that 20 percent would be much less.
But those two customers that we use the post office to
deliver less than 20 percent, a very small piece, are satisfied
with the slower services and less than--the visibility that we
provide with the total services that we offer, and so we do use
the Postal Service for those two accounts.
Chairman Collins. Thank you.
Mr. Smith, in some ways, your testimony seems to go even
beyond Mr. Eskew's when you refer to the difficulty of winding
down an organization that employs some 750,000 individuals. I
want to clarify what your position is since I do not think you
really are endorsing the dismantling of the Postal Service, if
it were practical, but perhaps you are. But what is your
position on whether the Postal Service should be in the parcel
delivery business?
Mr. Smith. Well, Senator, let me clarify the first point
there. What I was trying to say, perhaps not as clearly as I
meant to, is that the Congress of the United States has two
choices. Technological trends are such that you can either
decide to liquidate the Postal Service because that is what is
going to happen if you don't do anything. Technology is going
to basically fundamentally change it. Or, secondarily, you can
modernize it. We support the latter completely. And in that
regard, some of the things that we have recommended, not
dissimilar to what Mike Eskew said, are that the Postal Service
divide its competitive and monopoly products into two buckets.
And those competitive products have to bear an appropriate
level of the overhead and the cost structure of the Postal
Service.
If you really look at the practicalities of the situation
where the Postal Service shines compared to the private
delivery companies like UPS and FedEx, both of whom serve every
address in the United States the same way the Postal Service
does, it is in those very small, particularly lightweight
packages that can be commingled with letter mail. When the
Postal Service has to have a completely separate delivery
structure or an off-route delivery by letter carrier, that is
not a marginally costed activity. And if you divided the Postal
Service along the lines that we mention in here, into
competitive and non-competitive products, and had the
competitive products bear an appropriate level of the cost, my
guess is the marketplace would solve all this on its own. And
that is why we support the bill that Senator Carper authored
and a companion bill over on the House side which is headed in
that direction.
So we do very much support the modernization of the Postal
Service.
Chairman Collins. Thank you. Senator Carper.
Senator Carper. Thanks very much.
Just look forward, if you will for us, 10 or 15 years--and
think about when Ted Stevens was a freshman Senator, he held
hearings--I do not know that they were so much in rooms like
this, but he actually shared with me once that he held
breakfast meetings, I guess at his house here in the Washington
area, back in 1970, 1971, had people over for breakfast and
they talked about what kind of changes were needed in the
Postal Service. And out of those breakfasts--maybe we should
start serving breakfast at these. I don't know. But out of that
series of breakfasts came sort of the foundation for the
changes in the Postal Service that have endured for over three
decades.
I don't know that anything we will come up with will have
that kind of life span, but just look forward for us, and I am
sure in 1970 they did not know we would have an Internet, the
kind of changes that we see in the delivery of information. My
guess is that no one was even thinking about it then.
But look forward ahead for us 10 or maybe 15 years and tell
us what kind of postal system, delivery system, including your
operations, what are we going to have? I am asking you to be
futurists and look ahead. What do you think it will look like
10 years from now? Let's go in alphabetical order.
Mr. Eskew. When we think about the future in our business--
and then perhaps I will come back to the Postal Service--we
really think that it is goods and it is information and it is
funds. It is all wrapped together. It is commerce all over the
world in a much more global perspective than perhaps we think
about it now. So it is going to allow companies like ours to be
certainly one to one, each package as if it is the only one we
have, each customer as if it is the only one, and it will be
much more tailored and much more one to one with our--and that
information about the goods moving through our networks allow
us to do those kinds of things. So that is where I think that
we are headed.
Now, when you think about letters and documentation, Mr.
Smith said it the right way, I think, that certainly the
Internet and electronic transmissions, e-billpay, those kinds
of things are going to go much further and much easier and much
more--as younger generations age, it is going to be much more
well received than it is today. And it is going to be much more
practical to use it because it is going to be part of the
process of ordering, payment. It is all going to be the virtual
process of one touch, the bill gets cut, the bill gets paid, it
is all electronic, it never gets reduced to paper and never
finds its way into the Postal Service.
Senator Carper. All right. Mr. Smith.
Mr. Smith. Well, we have gone under a very simple premise
for a long time, and that is that whatever can be moved
electronically eventually will be moved electronically.
Now, that threatens, if you will, a great part of the
existing First-Class mail monopoly that the Postal Service has.
I think virtually all of the invoicing that currently moves
through the postal system will go to an electronic format
simply because the cost/benefit ratio is enormously favorable.
I mean, you can go online and find an invoice that you owe and
pay it for a few cents, where the overall transaction cost of
producing an invoice, mailing it, mailing back in a check is
well over a couple of dollars. So just the efficiency of that
will lead most institutions to go to an electronic invoicing
system. Most of the personal communications that are written
today have gone, of course, to E-mail.
Now, I think on the other side of the coin, however, the
Postal Service actually has a huge business opportunity in the
future because what the Internet and cable TV are actually
doing are balkanizing the broad communication systems in this
country. You know that from the political campaign business.
So the Postal Service has a tremendous advantage in that it
is a product-push organization rather than a customer-pull type
situation that the Internet is. If you are interested in
looking at something on the Internet or buying something on the
Internet, you have got to go on it and search it and find it.
The Postal Service can reach out to specific slices of society
like no other institution in terms of advertising, promotions,
publications, catalogues, and then that in turn will create a
tremendous amount of traffic going into homes and businesses,
some of which the Postal Service, if it is reformed along the
lines we suggested, can compete for and hopefully there is a
significant amount of business there for FedEx and UPS and
other private competitors.
So I am quite optimistic that there is quite a good
business for the Postal Service, but only if it is reformed and
can encourage and incent that business, and then on the other
side of the coin is required to cost account for competitive
products in a way that you do not get this muddled situation
that they have today about what is really costing what and what
this should cost versus that. So that is our view.
Senator Carper. Thank you. Talk to us a little bit about
corporate board structure. Look at your own corporate board
structure. Look at that that exists in the Postal Service with
the Board of Governors. I think in the President's Commission
they had recommended that we have a board of 12 members. I
think the Postmaster General would serve along with three
people, nominated by the President, confirmed by the Senate,
and then they would go out and select from others in the
country, eight or nine others to serve on the Board of
Governors. They would serve 3-year terms, not 9-year terms.
There would be age restrictions; I think no one could serve
over the age of 70. I think there would be a requirement that,
for people to serve on the board, they would have to have had
some experience in the enterprises that relate more or less to
what the Postal Service does.
Those are recommendations in the President's Commission,
and looking at your own operation, the way your own board
operates the way you select your members and what we are going
to be trying to figure out with the Postal Service, what advice
would you have for us?
Mr. Eskew. Again, with any board in our governance,
transparency is the rule of the game, and we need to make sure
that anything that the board of our companies is fully
transparent, fully reported, fully able to be audited and
applied to all the proper commissions. And that is a big part
of any part of governance for the Postal Service in the future.
In terms of the board makeup, independence may be a little
bit difficult because there are so many people that have so
many contacts with the Postal Service. That may be a bit
problematic.
Senator Carper. Everybody is a customer.
Mr. Eskew. That is right. That may be a little bit
difficult to do, but certainly independence and proper
oversight and transparency, the same type things that we do
with our boards.
Senator Carper. Mr. Smith.
Mr. Smith. Well, based on my experience both at FedEx and
serving on five other New York Stock Exchange companies over
the years, I would say that the fundamental requirement for a
good director of the USPS or any other large commercially
oriented enterprise is business understanding and business
knowledge. A person might not understand the particular details
of the business, but if they understand how a commercial
enterprise operates in general, they can generally provide good
input to that organization.
The second thing that they have to have is independence. In
our particular case, there is only one insider on our board.
All the others are independent directors and always have been.
I think at one time we had two insiders on the board, so it is
one out of 13. And I think that the second criteria is to have
strong, independent directors. And the third, just as Mike
Eskew said, is that you have to have a board that is willing to
and insists upon a great degree of transparency to the various
publics that oversee and depend upon the Postal Service.
Senator Carper. I might say, Madam Chairman, this issue of
transparency that they both come to, when we talk about the
issue of whether or not the Postal Service would have the
ability in the future to use the profits from their monopoly
operation to cover some of the overhead that relates to their
competitive products, to the extent we could have good
transparency, it would help ensure that that kind of thing does
not happen.
Chairman Collins. Thank you, Senator Carper. Senator
Voinovich.
Senator Voinovich. First of all, I would like to say that I
do not have the benefit of the time that the Chairman of this
Committee has had in studying the report of the Presidential
Commission. I apologize if some of this may sound redundant.
First, would you clarify if you are suggesting today that the
Postal Service get out of those areas where they have high cost
drivers and where the private sector is getting the job done.
One of the concerns I have--and I am sure the public has--
is that if the Postal Service withdrew from some of these
competitive businesses, it would impact pricing. For example,
if I am American Greetings or I am a big mail house like
Donnelley or a mail order business like Harry & David, there is
a concern that they are going to end up with one railroad and
not have competition. As a result of that see their costs go up
because there isn't any competition. What are your comments on
this?
Mr. Eskew. Senator, I will start. When we think about price
and we think--the Postal Service has a number of different
products, but I will simplify them into two. They go to market
with a monopoly set of products and products that compete with
the private sector. And when they go to market with that
monopoly set of products, then the burden is to make sure that
the cost is allocated and priced properly and it is managed
properly and transparency is all there.
The Postal Service has been able to allocate to each
product about 60 percent of the cost. About 60 percent of the
total cost is attributed to the product, and the other 40
percent is left over in overhead.
Think about what happens with the 40 percent that is left
over in overhead. To be able to partition those, they mark up
each of those sets of products. In the monopoly part, if they
mark those up by 69 percent, an extra 69 percent applied over
and above the attributed cost a monopoly might----
Senator Voinovich. In other words, you are saying that the
Postal Service uses one part of its business to subsidize other
parts.
Mr. Eskew. Well, they do mark up the monopoly products by
69 percent, only 28 percent in the competitive side. Two and a
half times as much is marked up in the monopoly side that is
protected. So that is something that when you do go to market
and when you do have those kinds of markups that are two and a
half to one, that gives us some concern. It is the price of
going to market with the monopoly and competitive products, is
proper oversight, proper regulation, proper reporting, proper
transparency, and proper regulation up front.
Also, if you think about who suffers because of that and
you talk about prices, it is the captive First-Class user who,
we believe, pays the price for the overall system. And so cost
burden is shifted, and depending upon how that cost is cut up.
Senator Voinovich. So you are saying that the First-Class
customers are subsidizing the inefficient operations of other
business lines? Are you saying the Postal Service should get
out of those inefficient operations? Don't you think that if
they did, the costs of UPS and FedEx would go up substantially?
Mr. Eskew. We have a lot of great competition that we have
to watch. We have to earn our business every day. And I did not
say get out. I do think it just needs to be on a level playing
field, and that attribution measurement certainly needs to be
evaluated much more carefully, and more than 60 percent of it
needs to be attributed to each product, and the way it is
marked up beyond that needs to be studied.
Senator Voinovich. Well, I want to say to both of you that
I am a customer, and both outfits do a very good job, and I
congratulate you on that.
The other issue I would like to ask about is the issue of
management. We have had the most revolutionary change in the
last 25 years in the Title 5 dealing with the Federal
workforce. And both of you have had an opportunity to observe
the postal management and how it is organized.
In terms of just fundamental business practices, empowering
people, training, giving employees the tools they need to get
the job done, what are your candid thoughts about the
management?
Mr. Smith. First, Senator, let me just clarify what you
said to the question that Mike Eskew answered. We have not
recommended that the Postal Service get out of anything. What
we have said is break it into two parts, the monopoly and the
competitive, and the competitive should be required to allocate
appropriately the cost when it is competing with private
industry, because, otherwise, you end up with someone
subsidizing someone else. It is just that simple. And there is
a great social experiment that has been going on for the last
10 years that shows what happens when you get oblivious to
those types of fundamental business principles, and it is what
has happened in Europe. It is incredible that these postal
monopolies have been able to take these enormous protected
monopoly cash flows and been able to diversify into competitive
businesses, which earn a fraction of the returns of the
noncompetitive businesses.
Now, whose interests have been served? Only one, and that
is the management of those regulated businesses over there.
So we do not propose anything other than what I just
mentioned, dividing it into two parts.
Regarding the management, it is first-class, and the
management of the Postal Service, particularly in the last two
administrations of Postmaster General Henderson and now
Postmaster General Potter, are as fine business executives in
transportation and distribution as I have seen anyplace. And I
think the common denominator there is that both of those
Postmaster Generals, as opposed to the political appointees
before, really understood the operations and the issues of the
Postal Service as an operating entity. And the political
appointees, while they were fine folks and some of them
personal friends, simply did not have that level of knowledge.
So the Postal Service is extremely well managed, in my
opinion, and it is because of that fundamental change that took
place with Postmaster General Henderson's appointment.
Chairman Collins. Thank you, Senator Voinovich.
We have been joined by Senator Stevens, who probably knows
more about the Postal Service than any Member of the Senate,
and we are very pleased he could find the time to join us this
morning.
OPENING STATEMENT OF SENATOR STEVENS
Senator Stevens. Thank you very much, Madam Chairman. I am
delighted to be here, and I am delighted that you are holding
these hearings. With the Postal Service and the two gentlemen
at the table, I think you are talking about three of the
largest employers in my State, as a matter of fact. So the
scope of this hearing is really, I think, most interesting to
us.
Unfortunately, I cannot stay because I have got an
appropriations hearing, but I did want to come by and pay my
respects to Mr. Smith and Mr. Eskew and the people that work
for them, as well as the Postal Service. I think the recent
changes in our economy show that we really have to find some
way to bring about a better balance in this, and I congratulate
you and the Committee for holding these hearings.
There is no question that the scope of the mailing industry
is changing, and its tasks are becoming just overwhelmingly
difficult really to balance all the interests involved.
I look forward to working with you and Senator Carper and
the Members of the Committee, Senator Voinovich, in trying to
find some answers to some of the questions that are being
raised here. But I do not have any questions for them. I,
instead, have thanks because I do not think we could get along
very well in Alaska without the Postal Service or the services
that FedEx and UPS provide to our citizens. I am happy to have
a chance to just drop by and say hello.
Thank you very much. As a matter of fact, I think FedEx is
the largest employer in my home town, so I am glad to see you
here, Fred. Thank you very much. [Laughter.]
Chairman Collins. Thank you, Senator Stevens.
I want to thank both of you for taking the time to come
testify personally. You both represent outstanding companies,
and I think we can learn a lot from your experience. So we hope
you will continue to work with the Committee as we proceed down
the road of postal reform.
Thank you very much for your testimony.
I would now like to introduce our second panel of
witnesses.
Gary Mulloy is the Chairman and Chief Executive Officer of
ADVO, Incorporated, the Nation's largest targeted direct mail
marketing company based in Windsor, Connecticut.
Gary Pruitt is the Chairman, President and Chief Executive
Officer of the McClatchy Company, which owns the Sacramento
Bee, the Minneapolis Star-Tribune, the Raleigh News and
Observer, and he appears today on behalf of the Newspaper
Association of America, which represents 2,000 large newspapers
plus a number of weekly newspapers. Mr. Pruitt serves as
Chairman of the NAA's Postal Committee.
Robert Wientzen is the President and Chief Executive
Officer of the Direct Marketing Association which represents
4,700 member companies, both commercial and nonprofit,
including numerous catalogue companies and direct mailers. Mr.
Wientzen has over 30 years of experience in the marketing
industry. In his position as President and CEO, he is
responsible to the DMA Board of Directors and oversees all
facets of the organization's work.
Mr. Mulloy, we will start with you. You may proceed.
TESTIMONY OF GARY M. MULLOY,\1\ CHAIRMAN AND CHIEF EXECUTIVE
OFFICER, ADVO, INC.
Mr. Mulloy. Thank you, Madam Chairman. I am pleased today
to represent the 3,700 associates of ADVO who serve 20,000
small and large clients across the United States. We are the
largest user of standard mail, and we spend about half a
billion dollars a year in postage. We are proud to be the
constituent of the Ranking Member of the Committee in
Connecticut, and we also have facilities in the States of most
of the other Members of the Committee as well.
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\1\ The prepared statement of Mr. Mulloy appears in the Appendix on
page 161.
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I would particularly like to thank Chairman Collins and
Senator Lieberman and the entire Committee for your work on
Public Law 108-18 which attempted to address the Postal
Service's CSRS funding issue. One of the key events of that
effort was a request by Senator Lieberman for a report from the
GAO. I thank the Senator for his initiative on that effort and
for the commitment of every Member of this Committee to see
that CSRS funding is corrected.
As a result of that law, the Postal Service has promised to
hold rates steady until at least 2006. Following three rate
increases in an 18-month period, this respite came at a
critical juncture for the Postal Service, our industry, and the
economy as a whole as it prevented another rate increase and
therefore created a window of opportunity for this Committee
and Congress to thoughtfully consider postal reform.
In the letter I received from the Chairman and Ranking
Member, I was asked to address a wide array of reform issues
being considered by the Committee. In response, I have
submitted written testimony. I will summarize certain parts of
my written submissions today.
I am going to focus today on a topic that is not always
considered exciting, and that is accounting. This Committee and
the Congress should address this issue in a comprehensive
manner. The issues I am talking about here are related to the
retirement and health care benefits which have actually been
mentioned this morning already.
If we would put the Postal Service on a truly transparent
and more clearly understood financial footing by addressing
these issues, we would then empower all other reforms to, in
fact, succeed. In addition, proper accounting of these benefits
would allow the Postal Service to keep its commitment to its
employees and retirees; that all pension and retirement
benefits and health benefits are paid, now and in the future;
and the Postal Service will be able to offer its customers an
extended period of rate stability that would allow it to take
advantage of our now recovering economy to grow volume and
revenue for the Postal Service and improve the financial health
not only of the USPS but our industry and the overall economy.
As one of the Postal Service's largest customers, I can
confirm the GAO's comments that predict spiraling, increasing
rates will continue to drive business, volume and revenue away.
Non-competitive pricing that creates higher than necessary
postal rates has led existing and potential customers
elsewhere. It has also led to the creation of competitive
alternatives that have drained revenue and profits from the
Postal Service. Some, like us, have even begun our own private
delivery services as alternatives and as a necessary hedge for
fear of continuing rising postal rates. If postal rates were
established, maintained, and managed in a more market-oriented,
efficiently run system, private industry would use the USPS
more, and both the Postal Service and industry would experience
growth.
Our current strategy calls for us to double our business in
the next few years. This will be done by expanding the
geographic coverage and increasing the frequency of what we do.
This expansion could bring significant additional business to
the Postal Service. However, we have already begun shifting a
significant portion of our business to alternate delivery. In
just the three markets where we currently conduct our own
private delivery system, we are delivering mail pieces that
have more advertising, are heavier in weight, with equal
readership and response to what we deliver through the mail,
and are achieving savings of over $6 million per year compared
to the cost of using the Postal Service. Unless changes are
made, much of our future growth will continue to be shifted
away from the Postal Service and into the alternate deliveries.
Now let me give you a glimpse of a different scenario.
Extending the current period of rate stability beyond 2006
would allow us to be even more aggressive in our expansion
because we would have the confidence that our largest single
cost would be contained. We have the latent ability to create 3
billion additional packages. Importantly, we would be able to
plan our growth in a rate-stable environment.
Continued rate stability would benefit the mailing
industry, the Postal Service, and the economy as a whole. This
is no overstatement. The volume generated by this hiatus in
rate increases, coupled with the impact of the important
reforms this Committee is considering, would set the Postal
Service on a positive course for the next generation. On the
other hand, frequent excessive rate increases, such as the
three that were implemented from the beginning of 2001 until
mid-2002, will decrease business and lead to the fulfillment of
GAO's prediction of spiraling declines in business.
Stable rates coupled with comprehensive reform are not a
pipe dream. This Committee can help lead the Congress to make
them a reality. Since 1971, the Postal Service has been
required to break even by charging mailers its cost of
operation. The USPS has not been chronically losing money or
breaking even in its operation, despite what many people have
said. In fact, since it was created, the Postal Service has
generated an operating profit, and a handsome one at that.
Since 1971, postal revenues have been billions of dollars
more than the cost of handling postal operations. Even if
Congress were to force the Postal Service to book 100 percent
of its health care liabilities today, the Postal Service still
would have generated billions more in excess revenue through
rates charged mailers and consumers in the past and still in
place today.
That money has gone to the Federal Treasury. The USPS is
not only not subsidized by the taxpayer, instead, surprisingly,
it has been subsidizing the taxpayer.
Last year, this Committee took the first steps to correct
the retirement overpayments made by the USPS to the Treasury.
This important first step was only a partial, temporary
solution and included some provisions whose effects were not
known by this Committee and Congress and that were not in the
best long-term interests of the Postal Service.
In implementing last year's action to correct the CSRS
overfunding, the Office of Personnel Management made a very
material accounting change to the existing 33-year methodology
that substantially reallocated to the Postal Service some of
the government's responsibility for its share of the pensions
earned as a result of work performed by postal workers prior to
1971. The 1970 Postal Reorganization Act made the Treasury
responsible for employee benefits earned while working for the
old Post Office Department and it made the Postal Service
responsible for benefits earned after they took over. For
years, the benefit obligation for retirees with employment both
before and after 1971 was allocated between the Postal Service
and the Treasury based on the number of years of service
employed at each agency, allocating the same dollar amount for
each year of employee service. Using that methodology, the
Postal Service has, as of today, even with last year's changes,
actually overfunded the CSRS liability by $81 billion. However,
that fact was masked when OPM, after discovering this
overfunding thanks to Senator Lieberman's GAO request,
responded by quietly adopting a new allocation method that
shifted much of the pre-1971 obligation to the Postal Service,
to the detriment of postal customers. Instead of an $81 billion
overfunding, the USPS was told the obligation was still
underfunded by $4.8 billion.
Interestingly, congressional language in Public Law 108-18
established a method by which the USPS could appeal the change
of the pre-1971 allocation to the CSRS Board of Actuaries. The
USPS has filed that appeal. They make the case in that appeal
that the original allocation method used for 32 years was fair
and recently determined to be consistent with sound, common
practice in both the public and private sectors by the Hay
Group, a well-respected actuarial firm commissioned by the
Postal Service.
The USPS has a sound and well-substantiated case. However,
the three-member, OPM-appointed board has not heard an appeal
in its 84 years of existence. It is unclear what timeline or
method will be applied to the USPS appeal. You have the
opportunity to take control of that process and codify the
former methodology in legislation, acknowledging postal
customers have been grossly overcharged over the years, and
make the operating and financial performance of the Postal
Service clear and transparent as a productive base from which
to implement other areas of reform.
In addition, part of last year's legislative fix of CSRS
was a new requirement that the Postal Service pay military,
Peace Corps, and other government retiree benefits. This
transferred an additional $28 billion in charges. We would
suggest, along with the Presidential Commission, that that
requirement be removed.
We believe that this Committee can put the Postal Service
on the road to financial health if you fix the problem of the
allocation of retirement benefits carried before 1971, transfer
the military benefits back to the Treasury, and release a
portion of the identified overpayments from the escrow created
last year. These actions will make prefunding health care
possible and eliminate the Postal Service's debt to the
Treasury. In addition, the Postal Service would have funds for
needed capital expenditure, and it can provide additional years
of rate stability going forward, that will, in fact, encourage
revenue and business success for the Postal Service.
We believe this resolution is fair to postal workers. We
believe it is fair to the Postal Service. We believe it is fair
to the consumer, and we believe it is fair to our industry
that, in fact, relies on the Postal Service for its livelihood.
Thank you for your time.
Chairman Collins. Thank you. Mr. Pruitt.
TESTIMONY OF GARY B. PRUITT,\1\ CHAIRMAN, PRESIDENT, AND CHIEF
EXECUTIVE OFFICER, THE MCCLATCHY COMPANY, ON BEHALF OF THE
NEWSPAPER ASSOCIATION OF AMERICA
Mr. Pruitt. Thank you, Chairman Collins, Senator Carper,
and Senator Voinovich. Thank you for the opportunity to share
the views of the newspaper industry on the important issue of
reforming the U.S. Postal Service. As mailers since the birth
of the Republic, newspapers want and need a healthy and vibrant
postal system for generations to come.
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\1\ The prepared statement of Mr. Pruitt appears in the Appendix on
page 169.
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The Newspaper Association of America encourages this
Committee to take a comprehensive and fresh approach to postal
reform, including addressing the difficult yet critical issue
of cost control. NAA supports most of the recommendations
outlined by the bipartisan Presidential Commission, and my
written statement provides a summary of the industry's position
on all of the major issues addressed in the Commission's
report. The main focus of my testimony is pricing flexibility,
an issue of particular concern to newspapers.
First, I would like to take a moment to describe how
newspapers use the Nation's postal system. Throughout our
history, newspapers have served as partners with the Postal
Service in its mission to bind the Nation together. Congress
has consistently recognized the important role newspapers and
other periodicals play in our Nation's postal system.
Newspapers today are among the leading local users of
postal services and, collectively, we spend well over $700
million on all classes of mail, particularly in periodicals and
standard mail. And because we collect the majority of our
revenue from subscriptions and advertising revenue through the
mail, we also have a special interest in first-class.
Newspapers, whether large or small, daily or weekly, serve
as vehicles for news and advertising. Generally speaking, there
are two kinds of newspaper advertising. One is commonly called
``Run of Press'' or ROP, and it appears on the page of the
newspaper. The other is called ``pre-prints,'' and they are
free-standing inserts that we either put inside the folded
newspaper or mail to non-subscribers.
Newspapers compete with other Postal Service customers,
particularly saturation advertising mailers, for both types of
advertising. Unfortunately, over the years this competition
with other mailers has served as a source of considerable
friction between newspapers and the Postal Service. Newspapers
do not believe that the Postal Service, an agency of the
Federal Government, should take sides in the marketplace
competition between one mail customer and another. Regrettably,
our experience has been that the Postal Service has, in fact,
chosen to favor our advertising competitors through pricing
strategies and new initiatives targeting the advertising
revenues upon which we rely to support news and editorial
content in our products.
In its 1998 marketing plan, the Postal Service clearly
presented its goal of harming newspapers in favor of
advertising mailers. It said the service would ``create the
platform for moving substantial revenues from pre-printed
newspaper inserts into the mail.''
Since this declaration, Postal Service actions have spoken
louder than words. It launched an ill-fated $10 million market
test called ``Auto Day'' that set out to divert automobile
advertising from the Milwaukee Journal and into mail. Last
year, in Iowa, the Postal Service employees made sales
presentations to newspaper advertisers encouraging them to move
their business out of newspapers and into direct mail. Finally,
the Postal Service continues to advance the misperception that
it is in the direct mail business. An example is its
description in its 2002 Transformation Plan in which the Postal
Service describes saturation advertising mail as ``low hanging
fruit'' it seeks to increase, needless to say, at the expense
of newspapers.
While our concerns about the Postal Service choosing sides
in the competition for advertising among mailers dates back
more than two decades, we have been encouraged by the recent
actions of Postmaster General Potter and his management team as
they refocus the Postal Service on its core mission of mail
delivery. We applaud their efforts, and we want to work with
them as customers.
Congress has heard from large mailers and the Postal
Service that they want pricing flexibility and that that is key
to the Postal Service's financial future. We encourage you to
examine these pleas carefully. There is a big difference
between improvements that benefit all mailers, making the
process of changing rates simpler, more efficient, and more
predictable, and certain changes that would allow large
influential mailers to get special deals for themselves. High
on the wish list for pricing flexibility is the ability to
enter into so-called negotiated service agreements, or NSA's,
with individual mailers.
Although newspapers are often the largest mailer in a local
market, we strongly oppose NSAs because we believe they
unfairly favor the largest mailers with deals made by a
government entity. Government services, here postal services,
should not be based on negotiating or lobbying skills. I urge
the Committee to support that principle.
Newspapers believe strongly that NSAs for the benefit of
individual mailers should be abandoned in favor of work-sharing
arrangements that are available to all mailers, both large and
small, who meet predetermined criteria for those rates, and
that such discounts should be based on cost savings. By working
with all mailers, the Postal Service would earn a far better
return on its investment of time and effort than if it spends
its energy and resources to negotiate special deals with
individual mailers.
While we oppose NSA's for individual mailers, we agree that
the current ratemaking process is too lengthy, too litigious,
and too expensive. NAA supports the creation of an expedited
rate-setting process that would also protect mailers from
unjustified or flawed rate proposals before they are
implemented.
The Presidential Commission has recommended that the Postal
Service should be allowed to set rates within certain limits
established by an enhanced Postal Regulatory Board, and under
this approach, rate ceilings could rise no more than inflation,
and within a rate index, the Postal Service would have
flexibility to make annual rate adjustments without going
through the current lengthy Postal Rate Commission process. At
the same time, mailers would be protected from large and
frequent rate increases. NAA supports this type of pricing
flexibility.
Newspapers believe, though, that even with this revised
system, mailers should be given at least an opportunity to
challenge postal rates before they are implemented upon a
complaint that a particular rate is flawed or discriminatory.
Such a system would not cause delay in a proper rate change as
the Postal Service must give mailers time to modify their
mailing software to implement new rates. But it would provide
an appropriate safeguard.
Newspapers also agree with the Presidential Commission that
with pricing flexibility must come enhanced oversight to ensure
that the Postal Service operates properly as a public service.
In particular, NAA supports the Presidential Commission's
recommendation to give an enhanced regulatory body the
authority and tools to ensure that the Postal Service is
appropriately allocating its costs across its competitive and
non-competitive products and services. The regulator in a
separate proceeding should establish the methodology used for
calculating and allocating costs and should be given necessary
tools to compel the Postal Service to produce cost data. A more
accurate and fair system for measuring and allocating costs
should be a prerequisite of any reform measure.
NAA appreciates the opportunity to provide the Committee
with our views on postal reform and specifically on the issue
of pricing flexibility. Congress established the U.S. Postal
Service as a fundamental public service with a mission of
providing universal mail service at affordable and non-
discriminatory rates. We look forward to working with this
Committee on comprehensive postal reform to improve this
essential public service.
Thank you.
Chairman Collins. Thank you, Mr. Pruitt. Mr. Wientzen.
TESTIMONY OF H. ROBERT WIENTZEN,\1\ PRESIDENT AND CHIEF
EXECUTIVE OFFICER, DIRECT MARKETING ASSOCIATION
Mr. Wientzen. Chairman Collins, I am Bob Wientzen, and I am
President and CEO of the Direct Marketing Association. On
behalf of the 4,700 members who are direct and interactive
marketers--and, by the way, that includes about 350 nonprofit
companies or entities that use mail to raise charitable funds--
I want to thank you for having us involved in these hearings.
We consider this to be a vital issue for our industry, and, in
fact, for its 9 million employees. This is the key to our
continuing to be able to grow and be part of this economy.
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\1\ The prepared statement of Mr. Wientzen appears in the Appendix
on page 183.
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Now, I also believe that direct marketing is, in fact, a
vital interest to the future of the Postal Service as well as
the economic and social interest of the country. Our business
has about a $635 billion impact on the economy, and our
nonprofits, in fact, raise about $50 billion a year through the
mail. That is an important part of the social services part of
the Postal Service's contribution to the fabric of this
country's economy and its social work network.
So we are talking about a major element of the economy and,
in fact, over 50 percent of the Postal Service's revenue from
both mail and parcels, a very important distinction.
From the outset, I want to tell you essentially what I told
the Presidential Commission, and that is, I do not believe that
you can find a solution to this problem without someone's ox
being gored. It is that simple. I do not think you are going to
be able to find a way out without achieving less than that
desired by some of the interested parties.
My biggest fear at the moment is that the Washington drive
to compromise will, in fact, produce a bill that ends up either
not being effective or not being effective over the long term.
And that view is shared by some of our larger members, who are
worried that, in fact, we will not have a long-term solution
coming out of this process. So that we want to acknowledge up
front, that this is a tough one for you all to be dealing with.
I want to cover a few of the key points that are covered in
detail in our written testimony.
Flexibility to set rates--clearly we think that the
keystone of this legislation needs to be the ability to set
increases on the part of the post office that are no more
frequently than yearly and that are at or below the rate of
inflation or the actual cost, whichever is less. To us that is
sort of a bottom-line basis.
We think that the post office and certainly us, the mailing
community, need to be set free, as Mr. Pruitt and others have
indicated, from this cumbersome and unbelievably costly
ratemaking process that we now have before us. We also believe
that the post office needs to have clear flexibility to achieve
negotiated service agreements.
On work sharing and workforce flexibility, another key
point, I believe that any solution needs to build on the 25
years of work-sharing experience that we have. We agree with
the GAO. We are saving $15 to $17 billion with the work-sharing
agreements we have now. That is more than the discounts that
are being provided. The post office needs the flexibility to
continue that program. It also needs the flexibility to right-
size its labor force and its infrastructure. There is no
question about that. It has to be able to match the marketplace
demand for its services, which is--as you heard earlier and we
certainly agree--going to continue to change.
Now, that may mean a smaller internal workforce over the
long term. I suspect it does. We think that can be handled by
the significant retirements that we are going to see over the
next 6 years.
Also, modest adjustments in the current collective
bargaining process may be in order. Specifically, we think we
should be seeing required mediation and, very importantly,
restricting arbitration awards to be prospective rather than
retroactive. We do not see any sense in that system.
Arbitrators, further, should be required to consider the
current marketplace conditions in their findings. This is a
changing communication world, and we think arbitration simply
has to take that into consideration.
Regarding workers' comp--I agree with the Presidential
Commission. An injured worker should receive the pension level
that he or she would have ended up with had they not been
injured. It is not comprehendible to me that somebody would end
up with a bigger retirement having been injured versus somebody
who served an entire career. And, Senator Collins, I know your
staff is working with the employee groups on some of these
issues to find ways to improve the collective bargaining
process. We applaud you publicly for that. We know that is not
simple. We would encourage you and we want to commit to being
helpful in any way that we can in that regard.
Let me make one additional point in that regard, and that
is, we think there should be a continued effort to find ways to
work with the employee units to increase volume. There is not
enough talk of that, and some of them are working with us to
try to find new ways to increase volume versus simply talking
about cutting costs.
Regarding universal service--we certainly support its
continuation, and we think it ought to be reviewed periodically
as the world changes. One important point, however, is we do
see a continued need for a parcel delivery service component on
the part of the Postal Service. It is vital to our members.
Many of them depend on it, and it does provide a competitive
base, and I think most of you realize that we believe that it
is part and parcel of the work of keeping the system
competitive.
Now, two final big points regarding civil service
retirement issues--we strongly agree with the Commission on
this issue, and effectively we would say to you let's make it
right, let's do it clearly, and let's do it as soon as
possible. There is no logical reason to continue the current
funding of military retirement benefits by the post office, no
logical idea that we have heard advanced, and we should not
force mailers to fund an escrow account or in any way continue
the mistakes of the past in that regard. Again, do the right
thing for the post office's future. And, Senator Collins, I
know your initial bill did not include that escrow provision.
To conclude, direct marketing is about arithmetic. It truly
is. It is that simple. While we are a big industry, it is about
the numbers. We use mail rather than use E-mail when mail
works. We use mail rather than space ads when mail works. And,
increasingly, there are competitions. We know that. Raising
postal rates, to my knowledge--and I have been in the business
a long time now, raising postal rates has never raised response
rates. And, in fact, that has made the Postal Service less
competitive with these other media. If we continue to raise
them, we will make it even less competitive in the future. It
is that simple.
When the math says it no longer works, people now switch to
other things, and they are increasingly doing so--a week does
not go by that I do not have a meeting about issues of E-mail
or wireless communication and so forth. And, in fact, if the
mail continues to go up, we are going to see much more effort
to use less of it.
So I think this bill is going to have to end the death
spiral that we have of increasing rates and diminishing volume.
And I commit the Direct Marketing Association certainly to
continue to work with all of you and ask that you really think
of the fact that this bill, if it even comes close to the
effort Senator Stevens and others made that was referred to
earlier, is going to have to last us for a long time. We really
need it to be effective.
Thank you very much.
Chairman Collins. Thank you, Mr. Wientzen.
Let me start by responding to some comments that you made
in which you expressed some skepticism about whether Congress
will produce a comprehensive and effective bill. We would not
be holding this, our sixth hearing on postal reform issues, if
this were not a serious endeavor to produce a bill that does
not just nibble around the edges but, rather, will be a
comprehensive effort. I see the Commission's report as
presenting an opportunity that will pass by if we do not act.
And a great number of the Members of this Committee have been
very active in this effort. So our goal is the kind of
comprehensive and effective bill that you seek as well.
In that regard, aside from the issues of fixing the escrow
account, which you correctly noted was not in the original bill
that we authored here in the Senate, and the military
retirement issue, what provisions do you believe are absolutely
essential to make sure this is an effective, comprehensive
bill?
Mr. Wientzen. Well, certainly as others have indicated, the
ratemaking process is really the keystone to, we think, the
future. If we limit rate increases to the rate of inflation--I
personally favor the rate of inflation minus some productivity
factor. That aside, if we limit those increases, then, in fact,
we will have a systemic reason for the Postal Service to be
more responsive to the marketplace demands. And I think that
will be very important. So that, I would say, is a key issue.
The issue of being able to right-size both the workforce
and the facilities, I think, is the second issue that we simply
have to find a way to depoliticize that. We have to find a way
to allow the post office adequate flexibility. The post office
is doing a great job. We think that we have a marvelous post
office. We really do. But, in fact, the fear is that they are
going to be hamstrung from continuing to be able to deliver a
competitive product if they do not have the ability to right-
size both the workforce and the facilities.
Those are the two big points I would advance to you.
Chairman Collins. Thank you.
Mr. Pruitt, in your testimony, you said, ``Newspapers agree
that the current ratemaking process can be too lengthy, too
litigious, and too expensive.'' You also say that, for good
reason, Congress has never granted the Postal Service both a
legal monopoly and pricing freedoms, and you go on to say that
Congress should take pleas for pricing flexibility with a
healthy grain of salt.
I would like to explore this issue further with you because
it is an absolutely key issue, and many of our witnesses have
said exactly the opposite. They said without the ability to
adjust rates, without a short-cut to the 18-month rate-setting
process, the Postal Service just is never going to become agile
enough and responsive enough.
If Congress were to give the Postal Service more pricing
flexibility, should the Postal Service be able to set whatever
rates it wants? Should it have a cap? Should it have a review
process before the fact or only one that is triggered after the
fact upon complaint? Could you explain what you think should be
done in that area now that we know your concerns.
Mr. Pruitt. Sure. I will do my best, and to the extent that
I am not complete in my answer, let me know.
We do think the current process is not effective--too
expensive, too lengthy, too litigious. So we do, in general,
support the Presidential Commission's recommendation on price
flexibility and the indexing mechanism.
Our concern there is that--and the way we would like to see
that work is it would be indexed, say, to inflation or cost,
whichever is lower, however it works, the rate announced, and
would be put into effect unless there is a complaint, at which
time the Postal Regulatory Board would quickly review and make
sure it is fair, and the rate would be imposed. That is not
unlike what the FCC used to do when they were administering
rates and fees on telecommunications. There would be a rate
announced, and without objection--and there usually was not--it
would go forward. If the rate is within the indexed amount, I
do not think there would be many objections.
But as the Presidential Commission pointed out, there are
different postal functions that are used in each class of mail,
so it does not necessarily follow that each will go up with
inflation or each will go up at the same level or at the same
time. Our biggest concern here is we do not want First-Class
mail subsidizing standard mail. We do not want a cross-
subsidization going on, and if there is an after-the-fact
review, we fear that there will be damage in the marketplace
with advertising and business switching in a fiercely
competitive marketplace that an after-the-fact review and
refund system will not adequately address.
And so we are concerned with an after-the-fact review, but
we do think the Presidential Commission is on to something with
an appropriate amount of pricing flexibility within an indexing
mechanism.
With regard to NSAs, our concern with NSAs is that we do
not think an essential public service should negotiate with
individual customers for a price break. We do not think that
that is the best or fairest or even most cost-effective way for
the Postal Service to address this issue. We think what they
should do is get the mailers together and establish work-
sharing criteria for all of the mailers and have input from a
wide array of mailers, it will be a better return to the Postal
Service. It will be fairer.
If you have an individual negotiation, that individual
mailer will seek to have terms that may be particularized or
individualized to its company, and that will be unfair to the
other mailers who are not a part of this negotiation. I think
it will be subject then to litigation and claims and not have
an adequate return on the effort that the Postal Service is
engaged in to create the NSA.
Senator Carper has incorporated some safeguards into his
proposal with regard to NSAs which I think are quite
encouraging and wise. But we still have concerns that hopefully
can be addressed.
I do not want to go on too long, but I hope that addressed
most of those questions. I would be happy to follow up if you
would like.
Chairman Collins. Thank you. Senator Voinovich.
Senator Voinovich. Mr. Mulloy, you made reference to the
accrued liabilities of the Postal Service. You think those need
to be tackled, $48 billion in unfunded retiree health benefits
and $6.5 billion for unfunded workers' compensation costs? In
other words, this is a ticking time bomb, and you are concerned
if we do not face that forthrightly that down the road you are
going to see these things just skyrocket.
Also, this is news to me. Did you say that the Postal
Service subsidizes the Treasury of the United States. Is that
correct?
Mr. Mulloy. Yes, Senator. Essentially what has happened is
that overcharges have been assessed to the Postal Service over
the years. The Postal Service has charged excessive rates and
those monies have been turned back to the Postal Service and
then back to the Treasury in a way of assessed retirement
benefits payments that were, in fact, not necessary. In effect,
therefore, the Treasury has been subsidized by the Postal
Service by incorrect assessment of retirement benefits payment
obligations.
Senator Voinovich. So what you would say is that that
should be looked at very closely and start to direct those
dollars, instead of going into the general fund, toward dealing
in a responsible fashion with these accrued liabilities. That
would be interesting.
Mr. Mulloy. Yes, sir, it would.
Senator Voinovich. Because our accrued liabilities for
retirement and health care in the Federal service, as you know
are enormous. We do not have the funds in many of these
accounts, and then when these retire, we have to take money out
of the income that comes in. It is a pay-in, pay-out type of a
system. And you are suggesting that, like any business, you
must put the money aside and deal with funding retirement
benefits in a responsible fashion.
Mr. Mulloy. Exactly, Senator. I would add that
unfortunately, in most commercial entities, the accrual for
retiree benefits is not necessarily 100 percent secure, as we
all know, even in the commercial world; and that, in fact, with
what the Postal Service has paid, for the last 30 years or so,
is in an enviable position, to actually deal with all these
issues at one time if we, in fact, look at that as a totality.
Senator Voinovich. Well, the problem is that, like so many
of the other trust funds, there is nothing. We have spent the
money.
Mr. Mulloy. Right.
Senator Voinovich. We say it is there, but it is not. So
that is something that really would need to be done over a
period of years in order to make it right.
Mr. Wientzen, you were saying something about competition.
I asked a question earlier of the other two witnesses about if
the Postal Service got out of parcel delivery, you would not
want that to happen.
Mr. Wientzen. No, Senator. We think that would be a serious
problem on a couple of fronts.
First, a large number of our members really do depend on
the parcel delivery service of the Postal Service. We are large
customers, and many of our members are entirely dependent on
the Postal Service for their parcel delivery.
Of course, we have a number of members who are delivering--
--
Senator Voinovich. Will you tell me, which members?
Mr. Wientzen. Well, I was just going to say, we have a
number of members who are delivering smaller parcels--books,
CDs, software, and so forth. Oftentimes, they are finding that
the Postal Service is absolutely cost-competitive and they
provide an adequate service.
Beyond that, there are many of our catalogue members--and
you heard, I think, an earlier firm, a couple of them--who find
that the Postal Service's products are cost-competitive, that
they are adequate for their needs and the Postal Service does a
good job.
I think finally we have a very serious concern that if the
Postal Service were to either be pushed out of the business or
to have encumbrances that make it less competitive, that, in
fact, you would see prices being driven up by UPS and FedEx,
good business practices that they would be, would simply move
prices considerably higher and that would be bad for our
members and bad for the customers that they serve.
I do not know why so many people think that, for example,
our industry, let's take just the catalogue part of our
industry, has switched over to the private delivery services.
They have not. There are many who use both, and we have a
fairly good number who use principally the Postal Service. And
I will tell you, many of them are not unhappy, again, with that
value proposition, the cost and the quality of delivery.
Senator Voinovich. The question is are you happy with that
service being subsidized by other customers of the Postal
Service?
Mr. Wientzen. Well, it is a fair question, and I would
argue, we do not think it is. We think that there is adequate
protection in place at this point. But, beyond that, I would
ask you to think about this: Does United Parcel charge all of
its customers the same rate? No. We know they do not. In fact,
I can tell you, having been on the other side, that you can sit
down and negotiate with United Parcel or with FedEx, and
depending on your volume and what you want and where you are
and how much business they have and a lot of other factors, not
just your size, you can come out with a different price.
Now, I would argue, if I come out with a better price than
you, are you, in fact, subsidizing me? I think you all have to
make a big decision here. Are we going to move this thing more
in a direction of the marketplace or not? And, yes, if you do
move it in a direction of the marketplace, are there going to
be a few inequities here or there? Yes, maybe so. But as long
as they are not significant and serious, I think you have to
decide to move it in a direction of a freer marketplace
situation. If the post office can do a good job at a reasonable
price and agree that they do not use the monopoly as the
principal way of subsidizing it, I think we have to open that
up, frankly.
And I would also say to you that we think opening it up to
other private delivery services, be they domestic or foreign,
is not inappropriate competition. We are not afraid of that.
Senator Voinovich. So you would say that you think they
ought to have the flexibility to look out at the marketplace
and look at what their costs are and what others are, and
understand that in totality to compete.
Mr. Wientzen. Well, I do. And I would say if you look
carefully under the hood, you would discover that there is one
form or another of ``unlevel playing field'' all over the
place. Do the private delivery services use other businesses to
subsidize delivery? They have leasing businesses that, in fact,
are less profitable than the delivery service. I suspect that
in today's world, we are going to see a lot of that. I grant
you that government services are different, but the big
decision you all have to tussle with is: Do you move this
Postal Service further away from being a government agency and
more into the private marketplace, competition world?
Senator Voinovich. My time is up.
Chairman Collins. Would you like to----
Senator Voinovich. I would just like to mention one other
thing.
Chairman Collins. Sure.
Senator Voinovich. We got into the issue of the workforce
in terms of needing flexibility, and as I mentioned earlier, we
have tried, working with the Chairman of this Committee, to
make some real changes in Title 5, for our civil service. The
concept is to work harder and smarter and do more with less; to
pay for performance and give agencies flexibility to bring in
people, for example, and paying them more than what the Federal
Government says you can pay because they need the experts, but
just giving them a lot more flexibility.
It has not been easy because there is some real concern in
terms of the employee unions, and I would like you to further
comment on that issue. I know the Chairman has been working
with the unions. We are trying to come up with something that
they feel is going to be fair. But from your perspective, are
we too inflexible in terms of our operations, in terms of human
resources?
Mr. Wientzen. Well, certainly you are less flexible or the
post office is a lot less flexible than the private sector
would be, and the fact is that that is where the competitive
pressures are coming from. So the answer is certainly yes,
there is a lot less flexibility.
I do think that you have made some progress. I think we
should acknowledge that. There is some great thinking going on,
and we are feeling generally positive. I will also tell you
that we are working with some of the unions in a much more
cooperative and proactive way. And we are seeing some different
focus by a number of those folks who do recognize now that
there is going to be a significant drop in the volume of mail
at the post office. And if we do not have more flexibility and
they do not join in on that, we are not going to have jobs one
way or the other.
But there are lots of things that you can do yet. For
example, I think preserving seniority if the trades move
between one kind--because that is going to have to happen, I
suspect. To have those inflexible silos like we have now is
going to be really a problem down the road in the next couple
years. You are going to have to have more flexibility there. I
think the grievance process and some of those kinds of things
need to be less bureaucracy oriented and faster. They need to
move along, less incentive for spreading out things. We think
the mediation thing I mentioned needs to be--we need to have
incentive to move all of these processes more quickly, to make
the post office more nimble and able to be competitive. It is
not now able to really be as competitive as they want to be or
they would be if we took some of the bureaucracy away from the
structure that they are having to deal with.
Senator Voinovich. Chairman, are the demographics the same
in the post office as they are in most of the other Federal
agencies in terms of this large group of people that are going
to be retiring that could make it more easy to do some of the
things that Mr. Wientzen suggests?
Chairman Collins. Absolutely. Forty-seven percent of the
postal workforce will be eligible for retirement within the
next 10 years. So the workforce reforms, in my judgment, do not
translate into the need for large-scale layoffs. I think a lot
of the right-sizing can be done in a compassionate way that
takes advantage of the aging workforce in the sense that they
are eligible, going to become eligible for retirement. So I
think a lot of the reforms that need to be instituted can be
done in a way that creates a positive working environment, and
I know that has been the Senator's concern as well.
Mr. Wientzen. And if you look at the detail of the numbers,
even within 6 years of--while we say a decade, if you really
look at the numbers, within the next 6 years you have got a
tremendous opportunity within that time frame to make a very
significant difference. We just have to take sort of the
boundaries of some of the things that the post office would do
in terms of shifting people around and so forth.
Chairman Collins. Thank you, Senator.
Mr. Mulloy, I want to talk to you because you have a very
interesting perspective. You are both a very large customer of
the Postal Service, but you are also a competitor. You
described in your statement that in three markets you have gone
to an alternative delivery system.
One of the issues that the Committee is debating is whether
or not the Postal Service should be allowed to compete in areas
where there are private sector providers. As you are well
aware, the Postal Service has had some bad experiences in
trying to sell products that really were not part of the Postal
Service's core commission, and they ended up being money-losing
enterprises.
So, first, I would like to get your view on the issue of
the Postal Service competing with the private sector. And
second, and a related issue, is whether there are additional
constraints that are needed, either statutory or regulatory, to
ensure fair competition and to ensure that there is not a
cross-subsidy between the monopoly products and the competitive
products.
Mr. Mulloy. I think to reply to the first part of the
question, I really do believe that we would support and I would
support that the Postal Service should be a stronger and more
competitive commercial entity. I think with that I am implying
that it should, in fact, compete with commercial entities that
are conducting the same kinds of businesses.
There should be a charter around the Postal Service in
terms of where it should properly focus its attention. Some of
the things that were attempted to be done with separating its
business into three separate buckets that begin to look at
First-Class separately from standard mail and some of the other
pieces of the business that it is in, we would support that.
But I do believe that the Postal Service should be encouraged
to be a competitive entity where it is doing its business.
Our company makes decisions to use our own private carrier
delivery system when we think it is economically attractive. I
wish that that were not something we needed to do to protect
the outlook for rates and the uncertainty of that rate process
going forward. If we felt that the Postal Service managed its
rates as most commercial entities do, which is setting the caps
around inflation, and understanding the way that you are
incentivized to manage your business then its customers would
have the reliance upon the fact that they are not going to have
an inflationary cost, especially when that cost is a major part
of the business that they do.
The second thing is that I think there is only a certain
amount of regulatory environment you can put around an entity.
You cannot legislate out every single thing that might, in
fact, be simply a slightly different way of interpreting
things. The idea that we need to fairly burden the cost of all
parts of the mail system with the cost of doing that part of
the mail is something that we would endorse.
That being said, in my 35 years of business, I know that
cost accounting is not a science. It is an art. And it, in
fact, does subsidize new ventures for a business. When a
company goes into a new business. In the very first company I
worked for, in the new product department of a personal care
company, they allocated what they called ``before fixed
overhead profitability.'' For the first 3 years of the
product's life they did not even allocate fixed overhead to
that product because it was being invested in as the future
growth of the business.
I am not implying that that is done broadly and deeply and
arbitrarily, but, in fact, it is a way that businesses look to
the future. And if we want the Postal Service to begin to look
to the future, it has to be looking at where its business is
going to come from and where it wants it to go. And I really
believe, as I think even Mr. Smith said earlier, that there is
a bright outlook for the Postal Service. I think there is a lot
of business to be had, as long as it is encouraged to
commercially market itself against the growing product streams
that are out there.
Chairman Collins. Mr. Pruitt, I would like to ask you a
similar question because in your testimony, you gave an example
of the Postal Service competing with the newspaper business.
And I remember it very well because my newspapers in Maine were
very concerned about that experiment as well to pull the
newspaper ads out as separate mailers. What are your thoughts
on the appropriate role for the Postal Service when there is a
private sector provider of the same service?
Mr. Pruitt. I think it is critical, and the Presidential
Commission got it right, it is an essential public service,
universal service, and in the First-Class and standard mail
area, it is a monopoly. And as a monopoly, it has worked well
to provide that universal service, and we do not object to that
at all.
Our only concern is cross-subsidization, and what we want
to ensure is that there is a postal regulator, a Postal
Regulatory Board, that has the power to ensure that measures
and allocation of costs are fair and appropriate and that the
Postal Service's delivery costs are covered within that class
of mail. And we do not feel it is appropriate for a government
service, a public service, with a monopoly to enter into
private agreements with the mailers and give them a price
break. That is our concern.
In the competitive areas, I think it is a principle where
cross-subsidies are also a problem, but, frankly, our biggest
concern is the cross-subsidy in the monopoly areas between
First Class Mail and standard mail.
Our experience has been that alternative delivery has not
been as effective in our products as mail delivery, and so we
have delivery of the newspaper and then we use the mail, and we
hope to use the mail, use it efficiently, but with fair
pricing.
Chairman Collins. Thank you.
Mr. Wientzen, what is your opinion on this issue, which is
going to be one of the major issues we tackle?
Mr. Wientzen. Well, first, initially, I would probably be
one of the few people saying I would let the Postal Service
sell Buicks if I thought they could make money on it as a kind
of a joke, but I do not believe we can, in fact, unbridle the
Postal Service and say go do whatever it is that touches your
fancy.
But the problem that you are going to have with this is it
is very easy to have a view of the right thing to do today. I
think the difficulty is to figure out what is the right thing
to do 5 or 10 years from now because the world is changing so
rapidly. And if we put the post office in a box and say you can
deliver letters and printed material, essentially what you are
doing now, and that is it, I think you are going to--somebody,
hopefully you, or someone else, is going to be sitting here 5
years from now scratching your head saying we really still have
a problem because there has been this significant shift or
there has been some new technology.
So I think you have to provide a lot more flexibility, and
to me, those who fear the post office just because of
competition, I do not think we can listen to them. I think
those who fear the post office because they do recognize that
the monopoly benefit that they get could be used to create very
unfair competition. But that is usually much more narrow than
is being described. And I will say we have many companies, some
of whom are my members, who would limit the Postal Service even
within the business of doing the mail that they do now because
it would benefit their particular business model.
I think in your wisdom, you are going to have to give the
post office more flexibility than they have, but you are going
to have to find some way to provide the private sector for
being protected from outlandish subsidization, I think as Gary
has pointed out. But if you keep this definition very narrow, I
am going to bet that in a few years we are going to have more
problems because the Postal Service will not have enough
business to continue doing the essential services they are
doing.
Chairman Collins. Thank you. Senator Voinovich, do you have
any further questions?
Senator Voinovich. Yes, just following up on your
questions.
Chairman Collins. Sure.
Senator Voinovich. The competition aspect is important to
me. I will recall that I ran a utility company when I was mayor
of Cleveland, and it was in pretty bad shape when I started. We
improved it substantially. Because we existed, we competed with
an investor-owned company. The fact of the matter is that the
businesses in our community benefited from that because we
would offer a price and the competition would offer a price,
and it kept rates down. You know, it was very good. Of course,
the investor-owned utility did not like it.
So I am real concerned about if we are going to be in a
dynamic area, that they should have the flexibility. The
question I have is: Do you have in your organization people who
are going to have a choice between either mailing something or
putting it in a newspaper?
Mr. Wientzen. Oh, absolutely, Senator. In fact, the vast
majority of my members, I would say 98 percent----
Senator Voinovich. So the fact of the matter is you have
got a choice of either sitting down with the advertising folks
at a newspaper and discussing how much is it going to cost you
to put that advertisement in the newspaper. The alternative you
have is to mail it and is it more cost effective to do that.
And in some instances--I do not know if it happens in your
State, but I get a lot of stuff now that is just delivered at
the door, advertising mailers, that type of thing, but usually
from local people.
Mr. Wientzen. Local people.
Senator Voinovich. Tell me a little bit about how that
works.
Mr. Wientzen. Well, as I say, our business is arithmetic.
You sit down and you say it is going to cost this much to
deliver this message, and my tests tell me--and we deal in
data. My tests tell me that if I do it this way, if I deliver
it in a newspaper or I deliver it in mail, here are the
response rates I get and here is the cost. I divide it and I
say that is within my margin of profit or not. And if it is
not, I do not do it. If it is, I do as much as I can of it.
What we are facing is there are new competitions, the
electronic ones, which, while the response rates are low, the
costs are low. And they are going to continue to be low. Even
if they go up, they are going to continue to be much lower. And
those are being used more and more as the costs for mail go up.
But, in reality, almost every one of our members look at
newspapers, magazines, mail, electronic, door-to-door, handing
out things in malls, they use all of those techniques when they
are economically viable.
Now, the other thing I think you need to keep in mind on
the competition point is that the Postal Service has a lot of
other burdens to deal with. They have universal service, which,
I mean, I think some of the households they deliver are not
exactly profitable ones. We know that. And so they have a
burden, a competitive burden that they are assuming as a part
of this monopoly package that they have taken on. Just as your
utility company, I am sure, did some things that a private
company would not have done had they not been a public entity.
And I think we need to think about that, that that does provide
some balance, and maybe there is a little advantage to the
public entity that is balanced off by the additional
obligations that they have.
Senator Voinovich. Well, Mr. Pruitt indicated that he did
not like the idea of the Postal Service going out and competing
for people that put advertising in the newspapers. I think that
is what you said. But if the Postal Service could do that
without subsidizing--in other words, that it is an even-steven
thing--why should they be prevented from going forward and
doing it?
Mr. Pruitt. They should not be prevented from offering the
monopoly direct mail service that our competitors can take
advantage of and that we take advantage of. We have no
objection to that. It is an essential public service. But there
are companies like ADVO, other the direct marketing companies
and newspaper companies that are in the advertising mail
business and take advantage of that service.
What we object to is the Postal Service taking a small
portion of its institutional or overhead costs and allocating
it to standard mail, and thereby taking first-class
institutional costs higher and artificially reducing standard
mail costs so that direct mail advertising is being cross-
subsidized by First-Class mail. And as a result, it hurts our
business because it is not a level playing field. If it were a
level playing field with no cross-subsidy, we would be fine. We
feel no problem with open competition. But our business is
about numbers as well. It is also news and advertising. And if
we lose advertising, we lose the ability to produce quality
news.
Senator Voinovich. Well, would that be the excuse to
discourage them from doing that? Is the reason why you do not
want them to do it because if they lose their advertisers, the
newspapers are going to be hurt in terms of their editorial
content and so forth?
Mr. Pruitt. We just want fair pricing, and we feel
perfectly comfortable going toe to toe with fair allocation of
costs.
Senator Voinovich. Your argument is that the First-Class
mail people are probably subsidizing their ability to compete
and get these folks to come in and be their customers. Is that
right?
Mr. Pruitt. That is right. The Postal Rate Commission
estimated that 66 percent of institutional costs, that is,
overhead, is allocated to First-Class mail and 22 percent is
allocated to standard mail, advertising mail. Yet they are
virtually identical in volume. It just does not seem fair.
Senator Voinovich. The thing is, though, in 2006 rates are
going to go up. From what I am understanding, when rates go up
it means that you are going to be more likely to look at some
other alternative sources than the post office.
What I am trying to say to you, if I am running a business
and I keep my costs at what they are today, and there is a
little cross-subsidization but I can go out and pick up some
more business, why shouldn't I be able to do it?
Mr. Pruitt. Because it is a monopoly, and if it has pricing
flexibility to disadvantage other customers as an essential
public service and disrupt a competitive advertising market,
that seems an inappropriate role for a monopoly government
service. If it were in the parcel business, it might be
different. I do not really have an opinion there. There is
competition with FedEx and UPS and others. But in a monopoly--
but in First-Class and standard mail, that is the only game in
town, as it should be. But then that means making sure that
their pricing is fair and evenly distributed to all customers.
Giving a monopoly that pricing power is something we do not
allow in the private sector, and certainly I do not think we
want to allow it for a government entity.
Senator Voinovich. Mr. Wientzen, what is your perspective?
Mr. Wientzen. The fact is that we do not think newspapers
are bearing the total overhead of the post office that indeed
they should or would if you did a direct cost comparison. We do
not begrudge them that. We do not suggest that it should be
changed because we do acknowledge that there is some special
informational value, etc. But we do think there ought to be a
balance here. There is already an advantage, in effect, in
their acknowledgment of the special case for newspapers. And my
suspicion is that we will only handcuff the post office if we
continue to put barriers in the competitive front.
I think you are going to have to make a decision and give
them more competitive strength than they have now.
Senator Voinovich. Madam Chairman, Mr. Wientzen said
somebody's ox is going to be gored. [Laughter.]
Senator Voinovich. We try not to do that.
Chairman Collins. We are just hoping it will not be ours.
[Laughter.]
Mr. Wientzen. I do, too, Senator.
Chairman Collins. I want to thank Senator Voinovich. He
always makes such a contribution to the Committee's work, and I
appreciate his taking the time to be here today.
I am sure all of us have additional questions. We are,
however, in the midst of the budget debate, as you know, and so
I am going to submit any additional questions for the record.
This hearing record will remain open for 15 days.
[Prepared statement submitted by Senator Lautenberg for the
record follows.]
PREPARED STATEMENT OF SENATOR LAUTENBERG
Madam Chairman: Postal reform is an important national issue, but
most Americans spend little time thinking about it because they take
postal service and the employees who provide it for granted.
The importance of the U.S. Postal Service (USPS) to our national
economy cannot be overstated. I'll give you an example: A 2-year delay
in postal rate increases has the potential to save publication
companies like Time Warner approximately $200 million in mailing costs.
Last year alone, the USPS delivered more than 200 billion pieces of
mail. So the important role the Postal Service plays in our economy and
the contribution of its 843,000 dedicated employees should not be
overlooked or taken for granted.
Having said that, this is indeed a time of great change for the
Postal Service. As the President's Commission has observed,
``traditional mail streams will likely continue to migrate to cheaper
Internet-based alternatives,'' even as the Postal Service's delivery
network expands at a rate of 1.7 million new addresses per year.
Given the existing regulatory structure, the Postal Service's debt
is likely to increase every year, making it tougher for the Postal
Service to achieve its fundamental mission of universal service.
Accordingly, it is clear that the Postal Service needs to become
more efficient and more effective in fulfilling its universal service
goal.
I support the Commission's recommendation to make the rate-setting
process less cumbersome and more efficient. Today, the process can take
upwards of 10 months; the Commission's recommendations would reduce the
rate-making process to 60 days.
I am also intrigued by the notion of increasing work-sharing and
private sector partnerships. I would hope, however, that such
partnerships are not at the expense of the hardworking men and women of
the Postal Service. Improving the Postal Service should not mean
gutting its workforce.
Today, I look forward to hearing from some of the U.S. companies
that rely on the delivery system of the Postal Service to operate their
business. I am also interested to hear from the Postal Service's
business partners and competitors about the recommendations of the
President's Commission and other postal reform ideas.
Thank you, Madam Chairman.
Senator Collins. We very much appreciate this panel's
testimony this morning as well as the previous panel. Our next
hearing is going to be on March 23, and it is going to be a
joint hearing with the House Government Reform Committee, at
which the Postmaster General will be testifying. We are going
to continue our work and hope to introduce a bill in April that
will incorporate all that we have learned at these hearings.
So thank you for your testimony this morning, and this
hearing is now adjourned.
[Whereupon, at 11:30 a.m., the Committee was adjourned.]
A P P E N D I X
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