[Senate Hearing 109-198]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 109-198
 
  U.S. POSTAL SERVICE: WHAT IS NEEDED TO ENSURE ITS FUTURE VIABILITY?

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

                                HEARING

                               before the

                              COMMITTEE ON
               HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE


                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION




                               __________

                             APRIL 14, 2005

                               __________

                       Printed for the use of the
        Committee on Homeland Security and Governmental Affairs


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        COMMITTEE ON HOMELAND SECURITY AND 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
TOM COBURN, Oklahoma                 THOMAS R. CARPER, Delaware
LINCOLN D. CHAFEE, Rhode Island      MARK DAYTON, Minnesota
ROBERT F. BENNETT, Utah              FRANK LAUTENBERG, New Jersey
PETE V. DOMENICI, New Mexico         MARK PRYOR, Arkansas
JOHN W. WARNER, Virginia

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


                            C O N T E N T S

                                 ------                                
Opening statements:
                                                                   Page
    Senator Collins..............................................     1
    Senator Lieberman............................................     3
    Senator Coburn...............................................     5
    Senator Akaka................................................     6
    Senator Warner...............................................     7
    Senator Carper...............................................     7
    Senator Stevens..............................................    14

                               WITNESSES
                        Thursday, April 14, 2005

Timothy S. Bitsberger, Assistant Secretary of the Treasury for 
  Financial Markets, U.S. Department of the Treasury, accompanied 
  by Roger Kodat, Deputy Assistant Secretary for Government 
  Financial Policy, U.S. Department of the Treasury..............    10
Dan G. Blair, Acting Director, U.S. Office of Personnel 
  Management.....................................................    13
Hon. John E. Potter, Postmaster General, U.S. Postal Service.....    21
Hon. David M. Walker, Comptroller General of the United States, 
  U.S. Government Accountability Office..........................    23

                     Alphabetical List of Witnesses

Bitsberger, Timothy S.:
    Testimony....................................................    10
    Prepared statement...........................................    33
Blair, Dan G.:
    Testimony....................................................    13
    Prepared statement...........................................    39
Potter, Hon. John E.:
    Testimony....................................................    21
    Prepared statement...........................................    45
Walker, Hon. David M.:
    Testimony....................................................    23
    Prepared statement...........................................    64

                                Appendix

Letter from Dan G. Blair to Senator Stevens dated April 20, 2005.    80
Prepared statements from:
    Diane J. Elmer on behalf of Cox Target Media, Inc. (Valpak 
      Direct Marketing Systems, Inc.), Largo, Florida............    82
    William Burrus, President, American Postal Workers Union 
      (AFL-CIO)..................................................    96
    American Forest & Paper Association..........................   103
Response to questions for the Record from Senator Carper for Mr. 
  Bitsberger.....................................................   107


  U.S. POSTAL SERVICE: WHAT IS NEEDED TO ENSURE ITS FUTURE VIABILITY?

                              ----------                              


                        THURSDAY, APRIL 14, 2005

                                       U.S. Senate,
                           Committee on Homeland Security  
                                  and Governmental Affairs,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 2:06 p.m., in 
room SD-342, Dirksen Senate Office Building, Hon. Susan M. 
Collins, Chairman of the Committee, presiding.
    Present: Senators Collins, Lieberman, Stevens, Coburn, 
Warner, Akaka, and Carper.

             OPENING STATEMENT OF CHAIRMAN COLLINS

    Chairman Collins. The Committee will come to order.
    Today, the Committee holds its ninth and final hearing, I 
hope, on Postal reform. The time and effort this Committee has 
devoted to this subject reflect its importance.
    The U.S. Postal Service is the linchpin of a $900 billion 
mailing industry that employs more than 9 million Americans in 
fields as diverse as direct mailing, printing, catalog 
production, paper manufacturing, and financial services. A 
healthy Postal Service is indispensable to thousands of 
businesses throughout the country. During this series of 
hearings, we have heard from many such businesses. Whether it 
is Time Magazine or a small community newspaper, affordable 
universal service is essential to a well-informed public. 
Whether it is a national retail giant or a small Maine 
manufacturer of down comforters, a vast sector of our economy 
depends on the Postal Service.
    Yet the Postal Service's future is not assured. At our 
first hearing in September 2003, the Committee heard from Jim 
Johnson, Co-Chairman of the Presidential Commission on the 
Postal Service, who emphasized that the Postal Service was an 
institution in serious jeopardy. Mr. Johnson went further by 
warning that, ``An incremental approach to 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 in First-Class Mail volumes, 
and the limited potential of its legacy Postal network that was 
built for a bygone era.'' That was a very strong statement, and 
it is one that challenges the Postal Service and Congress to 
embrace far-reaching reforms.
    The financial and operational problems confronting the 
Postal Service are serious, indeed. The Postal Service's long-
term liabilities are enormous, to the tune of $7.6 billion for 
workers' compensation claims, $3.5 billion for retirement 
costs, and $50 to $60 billion to cover retiree health care 
costs. The Postal Service also has yet to pay almost $2 billion 
in outstanding debt to the U.S. Treasury.
    There has been some positive news. The Postal Service has 
worked hard to improve its finances, and in an unexpected turn 
of events in late 2002, the Office of Personnel Management 
discovered that if the Postal Service's payments into the Civil 
Service Retirement System fund were to continue on the basis 
required under the then law, the Postal Service would overfund 
its estimated retirement liability by approximately $71 billion 
over a period of 60 years. Senator Carper and I introduced 
legislation to correct that funding problem. That bill's 
enactment enabled the Postal Service to delay its next rate 
increase and to more aggressively pay down the debt owed to the 
Treasury.
    Despite this reprieve, the underlying problems remain. One 
of the greatest challenges for the Postal Service is the 
decrease in mail volume as key components of business 
communication, such as bills and payments, move increasingly to 
the Internet. This is highly significant, given that First-
Class Mail accounts for 48 percent of total mail volume and the 
revenue it generates pays for more than two-thirds of the 
Postal Service's institutional costs.
    Two weeks ago, Senator Carper and I reintroduced Postal 
reform legislation, S. 662, the Postal Accountability and 
Enhancement Act of 2005. Our legislation preserves the basic 
features of universal service--affordable rates, frequent 
delivery, and convenient community access to retail Postal 
services. As a Senator representing a large rural State, I want 
to ensure that my constituents, whether they are living in the 
Northern woods of Maine or out on the islands or in the many 
rural communities in my State, have the same access to Postal 
services as the people of our large cities. If the Postal 
Service were to no longer provide universal service and deliver 
mail to every customer, the affordable communications link upon 
which many Americans rely surely would be jeopardized.
    Affordable, predictable Postal rates are also of paramount 
importance to thousands of businesses that rely on the mail and 
to their millions of employees and customers. This basic fact 
was brought into sharp focus at a hearing that I chaired in 
March 2004 in which we heard from several such businesses. One 
of our witnesses was Chris Bradley, the owner of that small 
Maine manufacturer of down comforters and pillows. It is called 
Cuddle Down. The previous rate increase in June 2002 raised 
standard Postal rates an average of 8 percent. Mr. Bradley 
pointed out that for Cuddle Down, that meant an increased 
postage bill of $240,000. He explained that was the equivalent 
of eight good jobs that would have to be cut just to stay even.
    Excessive and unpredictable rate increases clearly are a 
recipe for business failures and job losses. High rates also 
further reduce mail volume, aggravate the threat to universal 
service, and lead to even more rate increases. The only way to 
avoid what the Government Accountability Office refers to as a 
potential death spiral is through comprehensive reform, such as 
the bill we are considering today.
    We are working closely with the Administration to implement 
the recommendations of the Postal Commission appointed by 
President Bush. I believe those recommendations would put the 
Postal Service on the path toward financial solvency and 
prepare it for the challenges of the 21st Century.
    The Administration has, however, serious reservations about 
two significant Commission recommendations. The first is the 
question of how so-called savings that resulted from our work 
to correct the Civil Service Retirement System overpayments 
should be spent. The Administration proposes that the entire 
$43 billion in savings over the next 10 years be used to 
prefund retiree health benefits. This would take all of the 
benefits from correcting the overpayment away from the American 
mailing public and would lead to unnecessarily high rate 
increases. This really would amount to a tax on Postal 
customers.
    The second concern that the Administration has concerns who 
should bear the responsibility for paying the cost of 
retirement benefits for Postal Service employees that is 
attributable not to their time working for the Postal Service, 
but rather their previous military service. The Administration 
contends that the Postal Service must continue to pay these 
benefits. I believe that is unreasonable and unfair. It makes 
no sense to me that we are asking the Postal Service to pay the 
retirement costs for the military service of its employees. As 
the President's own Commission noted, this provision, ``asks 
those who use the Postal Service to subsidize the military 
every time they use the mail.'' And I would note that the 
Postal Service is the only entity that is asked to make 
retroactive payments for this cost.
    During this Committee's examination of the issues 
surrounding Postal reform, which has now spanned some 18 
months, we have heard from a wide range of experts. Some have 
been experts in issues pertaining to government finance and 
management. Others have been experts in running a business or 
in keeping the American people informed and in touch with each 
other. Their perspectives have differed, but their basic 
premise has not. They all told us that universal, affordable, 
and predictable Postal rates are a fundamental building block 
of our economy, and that is why I have spent so much time in my 
opening statement today making the point that the Postal 
Service is critical to the prosperity of our economy and it is 
the source, indirectly, of more than 9 million jobs. It is so 
fundamental. It is such a part of the fabric of American life 
that it can easily be taken for granted.
    As Benjamin Franklin, the founder of the very first U.S. 
Post Office, once said, ``When the well is dry, we know the 
worth of water.'' We must not allow this well to run dry, for 
we already know that we would lose something very precious.
    Senator Lieberman.

             OPENING STATEMENT OF SENATOR LIEBERMAN

    Senator Lieberman. Thank you very much, Madam Chairman, for 
that excellent opening statement. I don't know that I could add 
anything to it, so I won't try to. I will ask that my statement 
be included in the record.
    There are two things, maybe two or three, that I would say. 
One is that I am going to sometime later today figure out how 
to order something from a company called Cuddle Down. 
[Laughter.]
    It has already improved the course of my day, just hearing 
that term mentioned here.
    But second, is to thank you and Senator Carper, who I 
believe is on his way here today, for the extraordinary work 
you have put into this challenge of Postal reform. The Post 
Office means a lot to the American people. It is part of our 
history. It was one of the initial powers given to Congress in 
the Constitution, and it is facing challenges that obviously 
the Framers and Founding Fathers never envisioned. But we need 
it, and we need to do some things to keep its service universal 
and affordable.
    Because the Postal Service is such an important entity to 
the American people, there are a great diversity of groups and 
interests involved. There are many who would have said bringing 
those together, all those groups together to achieve a national 
purpose in Postal reform, was just about impossible. But you 
and Senator Carper have done it.
    Somebody, I think, described you the other day in this 
regard as having the wisdom of Solomon. I thought that was a 
bit gender biased. I wanted to say you had the wisdom of the 
Prophetess Deborah, and maybe Carper has a little of Solomon in 
him.
    The other thing I want to say to everybody here is what we 
all know, which is we have got to get together and do this this 
year or there is going to be a rate increase that will have 
very harmful effects on our economy. This is a delicately 
balanced proposal that Senator Collins and Senator Carper have 
put before us. To my way of thinking, not that anything is 
perfect, none of us are perfect, no product we come forth with 
is perfect, but the burden of proof ought to be on anyone 
making substantial changes to this proposal. What we really 
need is to get together and figure out how to get it done, not 
for any special interest, but really for the national interest.
    With that, and the hope that Senator Carper is on the way, 
I thank you very much, Madam Chairman. Look at that. Right on 
cue.
    [The prepared statement of Senator Lieberman follows:]

                PREPARED STATEMENT OF SENATOR LIEBERMAN

    Madam Chairman, thank you for convening this hearing and for 
crafting the reform legislation we will discuss today,and more 
generally, for your faithful commitment to guiding the postal service 
toward a more solvent future. You and Senator Carper have shown great 
determination in trying to repair the financial condition of the U.S. 
Postal Service, and all of America is indebted to you for your hard 
work.
    The Postal Service is one of our nation's oldest public functions. 
In fact, Section 8, of the United States Constitution gave Congress the 
power to establish post offices BEFORE it granted the authority to 
create a judicial system, declare war, or raise an army. The founding 
fathers recognized the importance of connecting a diverse and dispersed 
people through long distance communication, and 230 years later, the 
Postal Service remains essential to our economy and way of life.
    In the past year, mail carriers delivered over 200 billion pieces 
to 142 million homes, offices, and other delivery points. More than 
707,000 career employees work directly for the Postal Service, and it 
sustains a $900 billion mailing industry. In short, nearly every 
American depends upon it.
    The existing legislative charter for the Postal Service, the Postal 
Reorganization Act of 1970, has served us well for many years. But 
technological and other advances over the last few decades have altered 
the business model of most American companies, and while the Postal 
service has worked hard to keep up, there is only so much it can do. 
Now, it needs our help.
    E-mails, faxes, the web, and inexpensive long-distance telephone 
services have become increasingly popular substitutes for conventional 
mail. Even in the more traditional markets of overnight express and 
package delivery, intense competition has rendered the USPS a secondary 
player in most parts of the country.
    The Postal Service is unable to challenge this formidable 
competition, effectively partly because it operates under a cumbersome 
system that prevents quick rate adjustment to meet the changing needs 
of customers and the changing strategies of competitors. To make 
matters worse, use of the mails to deliver bio-terror agents B anthrax 
in 2001 and ricin in 2003 B has imposed significant, unexpected costs 
on the Service.
    On top of these challenges is the impending burden of large 
financial liabilities and obligations, including pension and retiree 
health obligations. The Postal Service's pension obligations were 
addressed temporarily in 2003 after we discovered the USPS was 
substantially overpaying its pension obligations and, without 
legislation, would have overpaid the U.S. Treasury by over $70 billion.
    The Postal Civil Service Retirement System Funding Reform Act, 
authored by the Chairman and Senator Carper, fixed the situation 
temporarily by allowing the Postal Service to use those savings for 
mail delivery through 2005 and avoiding a rate increase.Next year, 
however, it must begin paying the Treasury again, this time into an 
escrow account, until Congress decides how the money should be used.
    Already, the Postal Service Board of Governors is seeking a rate 
increase for next year to meet the $3.1 billion escrow requirement. 
That increase could bump postal rates up by approximately 5.4 percent.
    The fear is that we are approaching what those in the postal 
community call the ``economic death spiral,'' which occurs when falling 
mail volume and unreasonable financial obligations force postal rate 
increases that lead to further drops in volume. The way out of the 
death spiral is through focused leadership. And Chairman Collins and 
Senator Carper have provided that in the form of S. 662.
    Your bill provides a sound framework for reform. It would hold down 
rates by eliminating the escrow requirement and allowing the Postal 
Service to use much of the savings for delivering the mail. The bill 
would also return to the Treasury the obligation to pay for postal 
worker's retirement costs related to their military service. Other 
provisions would establish a more flexible and streamlined process for 
setting postal rates, and help establish a viable business model.
    Not all issues have been resolved, but this hearing is an 
opportunity to hear from knowledgeable witnesses who can help us 
understand and address those that remain outstanding. Thank you for 
participating, and I look forward to your testimony.

    Chairman Collins. Thank you.
    You can tell him that he is as wise as Solomon. He would 
have liked that.
    Senator Coburn.

              OPENING STATEMENT OF SENATOR COBURN

    Senator Coburn. Madam Chairman, thank you for your work, 
and Senator Carper, for your work, as well, on this. I am new 
to the Senate, just getting a good look at this bill, and I 
understand the requirements and the necessity of it happening.
    I think there are a couple of important points as I have 
gone through the testimony that need to be emphasized, and I 
know your bill goes toward that direction. Incentivization for 
efficiency is one of the things that has to happen at the USPS. 
We have got to reward people who save money, who come up with 
ideas to make the system more efficient. And I hope incentives 
can be expanded and made more an important part of the system 
because I believe people respond to that.
    And the second thing I would say is you mentioned the 
significant costs of health care. There isn't a hearing I go to 
that health care isn't involved, and it is out of control in 
this country. If we want to save some of this $50 billion, 
which we know 30 percent of all the health care costs in this 
country today don't help anybody get well, we need to all be 
concerned about overall health care reform in this country. I 
think every bill that we see has health care impact.
    The U.S. Postal Service is adversely impacted because of 
the inflation and lack of efficiency in health care, and we 
ought to consider even putting a demonstration project in this 
bill for Postal workers to cut the cost of health care, because 
it is out there. And where there are projects going, we are 
cutting the cost of health care 30 percent over the year 
before.
    So it is a big factor. It is a big benefit. It is something 
that people deserve. By not only cutting the cost, but 
improving the outcomes, we are seeing that it is possible, and 
I hope that you will consider that as we move forward on this.
    I congratulate you on the hard work that you have done. I 
look forward to hearing part of the testimony. I have to go to 
a Judiciary Committee hearing. I won't be able to hear all of 
it, but I assure you I will have read it and then will work 
with you to try to bring this to fruition. Thank you.
    Chairman Collins. Thank you. Senator Akaka.

               OPENING STATEMENT OF SENATOR AKAKA

    Senator Akaka. Thank you, Madam Chairman. I am pleased to 
be here this afternoon to discuss with our distinguished 
witnesses S. 662, the Postal Accountability and Enhancement 
Act. I welcome our panelists and thank them for their input 
into this important discussion.
    I also want to take the time, Madam Chairman, to compliment 
you and Senator Carper. I want to thank you for your steadfast 
dedication in crafting bipartisan legislation to ensure the 
future viability of the U.S. Postal Service.
    I had the privilege of serving as the Ranking Member 
alongside Chairman Collins throughout this Committee's series 
of hearings on Postal reform last year. It was my hope, and I 
am sure it was the Chairman's hope, too, that the bill 
introduced in the 108th Congress would have been considered by 
the Senate prior to adjournment. Although that was not the 
case, discussions have continued, and I thank all participants 
for their efforts in turning the challenges faced by the Postal 
Service into what I consider to be new opportunities.
    One area of particular interest to me is financial 
transparency. I have long advocated the need for greater 
financial transparency within the Postal Service. In fact, it 
was the lack of financial transparency that moved the 
leadership of our Committee several years ago to ask the Postal 
Service for a comprehensive transformation plan to address its 
short- and long-term operational and financial goals. I would 
like to add that Postmaster General Potter ably presented that 
report to the former Postal Subcommittee in May 2003. 
Therefore, it should come as no surprise that I support the 
provisions of the Collins-Carper bill dealing with financial 
transparency.
    There are a couple of major provisions of Postal reform, 
however, in which differences remain. One issue is military 
retirement costs, which I know our first two witnesses will 
discuss. Like the Chairman of this Committee, I do not believe 
it is fair that the Postal Service should be the only Federal 
agency to pay retroactive costs.
    Another issue is the escrow fund. While all parties support 
additional flexibility for the Postal Service, the 
Administration would mandate that escrow funds be used solely 
to fund post-retirement liabilities. Money used to pay down the 
long-term liabilities is money unavailable to cover the other 
costs. That is why I support the provisions in S. 662, which 
would use the escrow fund to prepay Postal retirement health 
care costs, to pay down any outstanding debt, and to hold down 
operating expenses, all of which affect Postal rates.
    Chairman Collins, I regret that I am unable to stay for the 
entire hearing, but I want you to know how much I appreciate 
what you and Senator Carper are doing on this issue, and I look 
forward to working with you to ensure that the Postal Service 
is able to maximize performance, maintain financial viability, 
and adapt to its competition. Thank you very much.
    Chairman Collins. Thank you very much, Senator. You 
contributed greatly to the bill last year, and we look forward 
to continuing to work with you.
    Senator Warner.

              OPENING STATEMENT OF SENATOR WARNER

    Senator Warner. Madam Chairman, I won't make an opening 
statement. I just associate myself with the remarks of my 
friend and colleague from Hawaii.
    My first Federal job was in 1943 as a 16-year-old mail 
carrier because there was nobody else around during World War 
II to carry mail. So I have always had a great respect and 
affinity for the Postal Service, and I am going to be counted 
on as a supporter. Thank you very much.
    Chairman Collins. Thank you. I knew a lot of your 
distinguished past, but I didn't know that it included being a 
letter carrier, as well.
    Senator Warner. That is right.
    Chairman Collins. That is wonderful.
    Senator Warner. Thank you. And I got bitten by a dog once, 
too. [Laughter.]
    Chairman Collins. I have a feeling that there are a lot of 
letter carriers out there who could relate to that experience, 
unfortunately.
    I am now very pleased to call upon Senator Carper, who is 
the primary co-author of this bill.

              OPENING STATEMENT OF SENATOR CARPER

    Senator Carper. Thank you, Madam Chairman. I have said this 
many times publicly and privately. It has just been a joy 
working with you and your staff on this effort.
    To Senator Akaka, we wouldn't be this far along without 
your help and support and that of your staff, and we are 
grateful for that. Thank you for your kind words.
    I thought we actually had an excellent chance last year to 
enact meaningful Postal reform legislation for the first time 
in, I guess, more than three decades. Madam Chairman, you and I 
worked with all of our colleagues on this Committee and some 
that aren't to draft a bipartisan bill that enjoyed the support 
of a wide variety of interests, from labor unions on the one 
hand, to the largest mailers, to the Postal Service's private 
sector competitors. And I wasn't sure I would ever be able to 
say that last part of that last sentence.
    That bill that we introduced and worked through ultimately 
passed this Committee on a 17-0 vote, and its House counterpart 
also passed through the Committee over there unanimously. We 
all know we were unable to get a debate on the floor of the 
House or the Senate on Postal reform legislation. It continues 
to amaze me. The bill is reported out of the Committee after 
years of back and forth. It had unanimous consent in both of 
the relevant committees. It couldn't get onto the floor for 
debate.
    But I am confident that this will be the year when we get 
something done. Given all the time, energy, and effort that has 
been put into it, we ought to.
    We once again have a bipartisan bill that enjoys wide 
support. Also, just yesterday, I think our colleagues in the 
House, and you probably already said this, but our colleagues 
in the House were again able to get their version of our bill 
through the Government Reform Committee, again unanimously, on 
a 39-0 vote. I believe our bill this year is even better 
because I think we benefited from the active engagement of a 
number of folks, including some people in the Bush 
Administration.
    I have been critical, as you know, of the Administration's 
views on Postal reform--some of the Administration's views on 
Postal reform in the past. Let me say, the Commission appointed 
by the President, which actually agrees with us on military 
pensions, which agrees with us on the escrow account issues--
they don't agree with the guy who appointed them, but the 
Commission agrees certainly with us on those issues. But while 
we still have some disagreements with the Administration, I 
think we have narrowed those, and I am pleased we have been 
able to work with them in recent weeks to include in our bill a 
number of the President's priorities in areas like financial 
transparency and executive pay and the rate cap itself.
    It is my hope that we can continue to work with the 
Administration in the coming weeks to come up with an agreement 
on what I believe are the final issues we don't see eye-to-eye 
on, Madam Chairman. It is too bad Senator Warner has left, 
because in addition to carrying mail at the age of 16, he was 
Secretary of the Navy. He also served in the Navy and in the 
Marine Corps. I served in the Navy, too. He was my Secretary of 
the Navy when I was on active duty during the Vietnam War. I 
still call him Mr. Secretary, and he calls me Ensign Carper. 
[Laughter.]
    No. In all honesty, he calls me Lieutenant Carper.
    How can we say with a straight face, or how anyone can say 
with a straight face, that somebody who has served in the Army, 
Navy, Air Force, and Marines, have accrued that time in service 
to our country, and they go to work for a Federal agency, the 
Treasury Department covers the time for pension purposes, the 
time that they served on active duty. Yet if they go to work 
for the Postal Service, that same person, we expect the 
ratepayer to pay for the military portion of their service. 
That is just wrong, and it is wrongheaded, as well, and we have 
got to fix that.
    As my colleagues, certainly you, Madam Chairman, are aware, 
the Postal Board of Governors just last month sent a formal 
request to the Postal Rate Commission to raise Postal rates by 
some 5.5 percent next year. This would be an increase of about 
two cents on a first-class stamp. It would also be the first 
rate increase since 2002, when we took action to prevent what 
could have been, I think, a devastating rate increase by 
reducing the Postal Service's annual pension payment. Let me 
just say that again--annual pension overpayment, because they 
were overpaying what they owed for pension purposes.
    I am told that this new rate increase of 5.5 percent likely 
wouldn't be necessary if the Postal Service were not required 
to begin depositing its pension savings in escrow beginning 
next year. And while this new request is smaller than some of 
us expected, future rate increases will probably get bigger and 
bigger if we don't do something about the escrow.
    Let me just conclude by saying I am eager to work with the 
Administration on these issues because keeping the Postal 
Service healthy is a vitally important part of keeping our 
economy healthy. The mailing industry is nearly a $1 trillion a 
year business. I continue to be struck by the number of people 
that literally step out of almost everywhere and say how 
important Postal reform legislation is. I never imagined how 
many businesses and families are actually interested in what we 
are doing here. I am not sure that all of our colleagues are, 
but this is something that is vitally important to the economic 
lifeblood of our country.
    We have been joined by Senator Stevens. I would just say to 
Senator Stevens, again, you are the father of our Postal 
Service. We have people called Solomon-like here. We had people 
called prophetesses, and we will call you the father of the 
Postal Service, because you are. The idea of leaving a legacy 
that endures for 3\1/2\ decades is just, I think, 
extraordinary, especially for something of this magnitude.
    Let me close, Madam Chairman, just to point out that I 
realize our Postal reform bill does not satisfy all the 
stakeholders involved in this issue. It probably doesn't solve 
all the Postal Service's problems, either. Many of those 
problems will have to be solved by the Postal Service itself, 
and frankly, they are solving some of those--a number of those 
problems by themselves, and I give them high marks for that.
    What the bill does do, I think, is to give Postal 
management the tools and the flexibility needed to run the 
Postal Service more like a business at a time when there is 
fierce competition from a whole lot of sources--E-mails, 
electronic bill payment, other forms of electronic 
communication, competitors who are carrying a lot of the 
materials that used to be, frankly, carried by letter carriers.
    I think more importantly, though, our bill further shores 
up the Postal Service's finances, preserves its commitment to 
serve all the people in all of our communities.
    Madam Chairman, I have enjoyed so much working with you and 
our colleagues. The only thing that I would enjoy more is 
getting a good bill on the President's desk that he would 
actually sign, and that is my commitment and I know it is one 
we share.
    Chairman Collins. Thank you, Senator.
    I do want to acknowledge Senator Stevens joining us. As my 
colleague said, he truly is the father of the modern Postal 
Service. I have also learned from our experience over the last 
18 months why Postal reform is only successful once every 35 
years, and this year is going to be the year. But we are very 
grateful to have him here with his expertise and experience, 
and I am particularly pleased to announce that Senator Stevens 
told me earlier today that he will join as a cosponsor of our 
legislation, and that certainly gives it a big boost, as well.
    I am very pleased to welcome our first panel of witnesses. 
Timothy Bitsberger is the Assistant Secretary of the Treasury 
for Financial Markets. He serves as a senior advisor to the 
Secretary of the Treasury on a broad range of matters, such as 
domestic finance, financial markets, and Federal debt. 
Assistant Secretary Bitsberger is accompanied by Roger Kodat, 
the Deputy Assistant Secretary for Government Financial Policy.
    Dan Blair is testifying on Capitol Hill for the second time 
today. He was at an Armed Services Committee hearing this 
morning. I hope, Dan, that you at least got time for some 
lunch. He is the Acting Director of the Office of Personnel 
Management. He was originally appointed as OPM's Deputy 
Director in February 2002. He has extensive experience in the 
civil service sector, and he served for, I believe, 17 years on 
the staff of this Committee and its House counterpart. So we 
are pleased to welcome you.
    Mr. Secretary, we will start with you.

 TESTIMONY OF TIMOTHY S. BITSBERGER,\1\ ASSISTANT SECRETARY OF 
  THE TREASURY FOR FINANCIAL MARKETS, U.S. DEPARTMENT OF THE 
    TREASURY, ACCOMPANIED BY ROGER KODAT, DEPUTY ASSISTANT 
 SECRETARY FOR GOVERNMENT FINANCIAL POLICY, U.S. DEPARTMENT OF 
                          THE TREASURY

    Mr. Bitsberger. Thank you. Madam Chairman and distinguished 
Members of the Committee, thank you for the opportunity to 
testify today on the need for comprehensive Postal reform. I 
will summarize my written testimony and request that my full 
testimony be included in the record.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Bitsberger appears in the 
Appendix on page 33.
---------------------------------------------------------------------------
    The President has articulated the need for comprehensive 
Postal reform to set the Postal Service on sound long-term 
operational and financial footing. My remarks this afternoon 
will focus on four of the Administration's five reform 
principles: Flexibility, self-financing, transparency, and 
accountability.
    First, I turn to flexibility. Pricing is a key part of the 
flexibility that the Administration believes the Postal Service 
needs. We support a hard rate cap which provides that rates for 
any class of mail cannot rise more than the Consumer Price 
Index in any given year. We support the Committee's attempt to 
establish a hard cap at CPI and further support the Senate's 
version of an escape clause or exigency rate case which 
establishes a very high bar to increase rates above CPI.
    We also seek to provide the Postal Service with flexibility 
on its cost side, as well. We note that the Postal Service's 
$66 billion cost base provides significant opportunity for cost 
reductions without jeopardizing service quality or its 
universal service obligation. While some may dispute the 
absolute size of the potential reductions, it is indisputable 
that productivity at the Postal Service has lagged the private 
sector by large margins and that more effective management 
practices should be able to make significant progress in this 
area.
    Flexibility is not a blank check, though. The Postal 
Service currently has the ability to negotiate its portions of 
the premiums for health and life insurance for its employees. 
The Postal Service has taken advantage of this ability and 
negotiated benefits beyond those offered by the U.S. 
Government. Combined, the Postal Service has increased its 
costs for health and life insurance premiums by over $870 
million annually above what the Federal Government pays for 
most of its other employees.
    We have focused on a model where management has the 
flexibility to operate as a business within the constraints of 
a rate cap. This provides the right incentives for management 
and derives greater board and management accountability.
    Now, I will turn to the principle of self-financing and the 
issue of the Postal Service's unfunded liabilities. The 
Administration believes that comprehensive Postal reform must 
require the Postal Service to color all of its financial 
obligation, including its on and off-balance sheet unfunded 
liabilities. It is important to recognize that since the 1970 
Postal Reorganization Act, the Postal Service has never 
satisfied the statutory mandate of being fully self-financed. 
The Postal Service has accumulated approximately $75 billion 
worth of unfunded post-retirement health, pension, and workers' 
compensation liabilities.
    The Postal CSRS Funding Reform Act has provided a unique 
opportunity to substantially improve the financial health of 
the Postal Service by dedicating all of the escrow to fund the 
unfunded post-retirement health obligations, which are 
approximately $64 billion. Without action, these unfunded 
liabilities grow to almost $100 billion in 2011 and over $1 
trillion in 2045. We believe that the Postal Service should 
have a financing plan in place to ensure it can cover its post-
retirement health care costs, and our proposal does just that.
    We also recognize concerns from ratepayers over the 2006 
rate case. The Postal Service has indicated that the need for 
the 2006 rate case is necessitated by the escrow established by 
the Postal CSRS Funding Reform Act, and that without access to 
the escrow, rates must rise to compensate. We believe that this 
analysis excludes the real reasons for the 2006 rate case. The 
reality is that any additional financing requirements of the 
Postal Service can be directly attributed to its inability to 
sufficiently reduce its cost since 2002, which is the date of 
the last rate increase. It is interesting to note that if the 
Postal Service had the authority to raise rates under the CPI 
capping proposed, the rates that would be in place today and in 
2006 would be higher than what the Postal Service is currently 
proposing.
    We note that personnel costs are projected to be $6.9 
billion higher in 2006 than in 2002, despite lower head counts. 
And fuel costs are projected to be over $700 million higher. 
The point of highlighting these two line items, which combined 
are well over two times the $3.1 billion rate increase that the 
Postal Service is asking for, is to demonstrate that the rate 
increase has its roots in the Postal Service's general cost 
structure and is not linked to the escrow. To be clear, the 
amounts that constitute the escrow are in the rate base through 
all of the previous rate cases. The escrow amounts do not 
represent a new cost to be recovered.
    The Administration understands the concern over the 2006 
rate case, but we also believe that all escrow funds should be 
committed to paying down unfunded liabilities rather than 
diverted in order to minimize a near-term rate increase.
    Transparency is another key principle framing reform. The 
Administration believes that real financial and operational 
transparency is essential to Postal reform. We seek to obtain 
this enhanced transparency through SEC reporting standards and 
a robust, independent regulator. We are pleased that the Senate 
has seen fit to adopt many of the Administration's 
recommendations in this area.
    Financial transparency is important for ratepayers, 
taxpayers, competitors, employees, and management. With the 
expanded flexibility that the Postal Service will have on 
pricing discounts and service agreements, the Postal Service 
needs to fully understand the true financial implications of 
its decisions and needs to develop and instill a culture that 
measures and understands its costs at a very fine level, which 
is consistent with best practices in the private sector. 
Private sector companies generally produce product line 
financial statements for internal purposes, which include 
performance measurement and the pricing of products, services, 
and contracts.
    Finally, I want to add a short thought on accountability. 
Accountability will result in many ways through our reform 
efforts. A hard rate cap that has a strict escape mechanism 
will drive management accountability. A strong regulator will 
drive accountability, and real financial transparency will 
drive accountability. The Administration looks forward to 
actively working with you to craft a comprehensive reform bill 
that will stand the test of time in an enormously dynamic 
market.
    Thank you. I am pleased to answer any questions that you 
may have.
    Chairman Collins. Thank you.
    Mr. Kodat, it is my understanding that you are here to 
respond to questions but that you don't have a formal 
statement, is that correct?
    Mr. Kodat. That is correct.
    Chairman Collins. Thank you. Mr. Blair.

 TESTIMONY OF DAN G. BLAIR,\1\ ACTING DIRECTOR, U.S. OFFICE OF 
                      PERSONNEL MANAGEMENT

    Mr. Blair. I see some familiar faces here this afternoon. 
Thank you for having me. Chairman Collins, Senator Carper, and 
Senator Stevens, thank you for permitting me to testify today 
on behalf of the Office of Personnel Management.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Blair appears in the Appendix on 
page 39.
---------------------------------------------------------------------------
    The President has laid out clear guiding principles for 
Postal reform legislation. You have made good progress toward 
incorporating many of the Administration recommendations 
consistent with these principles into your new Postal reform 
bill. However, the Administration still holds firm to the 
principle of self-financing as the means of ensuring the Postal 
Service continues to meet all of its obligations. That means 
revenue from ratepayers, not taxpayers, funds the employer 
obligations, including recognizing military service in its 
retirement funding planning.
    The Postal reform legislation currently pending before the 
Senate runs counter to this principle. The proposal would 
relieve the Postal Service of $27 billion in pension 
obligations for funding military retirement credit for Postal 
employees covered by the Civil Service Retirement System. 
Legislation enacted last Congress reduced Postal pension 
obligations by $78 billion. That legislation provided a model 
funding structure for Postal pension obligations under the CSRS 
and provided appropriate pension relief.
    Now, funding of Postal pensions is patterned after that of 
the Federal Employees Retirement System. FERS is a fully 
funded, actuarially sound pension system whereby all agencies 
are required to fully fund retirement costs, including all 
military service costs. Concerns have been expressed that that 
law singled out the Postal Service as the only agency required 
to fund military retirement credit for its CSRS employees. 
However, the USPS is different from other agencies and 
departments. It operates from revenues derived from the sale of 
its postal services and is required to fully fund its 
operations. Retirement funding is part of those operations. 
Covering the cost of employee pensions is a normal cost of 
doing business.
    Since 1974, Congress has consistently singled out the 
Postal Service in requiring it to pay more of its retirement 
costs. Further, the Postal Service is not the only agency to 
fund the cost of military service under CSRS. Last year, the 
Patent and Trademark Office was required to fully fund its CSRS 
costs, as well.
    Efforts to shift responsibility for fully funding Postal 
obligations from the Postal Service to Treasury represent a 
step backwards from sound pension funding and could potentially 
destabilize future retirement funding. Postal rate increases 
since the Postal Reform Act of 1970 have largely mirrored 
inflation. It is inaccurate to attribute any new Postal rate 
increase to the USPS paying for military service credit. The 
facts are that the USPS pension obligations have actually 
decreased due to the passage of legislation last year. Shifting 
responsibility for pension coverage does nothing to improve or 
increase Postal efficiency and does not represent any true 
reform.
    Your bill correctly requires the Postal Service to prefund 
its retiree health benefit costs, thereby recognizing and 
addressing these liabilities. However, the legislation would 
use retirement funds now allocated to address the military 
pension liabilities to pay for this. We believe prefunding 
retiree health benefits as provided in S. 662 is a responsible 
plan. We urge you to delete the provision using transfers from 
the retirement fund.
    Madam Chairman, you and Senator Carper and the Members of 
this Committee have shown great leadership in taking on this 
complicated and contentious issue. We appreciate the 
opportunity today to participate in the hearing and your 
willingness to work with the Administration in an effort to 
enact true Postal reform legislation.
    This concludes my statement. I would be happy to answer any 
of your questions.
    Chairman Collins. Thank you very much, Mr. Blair.
    Mr. Blair, as you know from your work at OPM, the Postal 
Service is required to give preference to veterans in hiring 
people to work for the Postal Service. Doesn't it seem to be 
unfair to require a preference to be given to veterans and then 
penalize the Postal Service by requiring it to pay for these 
veterans' military service when it comes time for them to 
retire, considering that if the same veteran went to work for 
HUD or HHS or the Department of Agriculture, those Departments 
would not be expected to bear that cost?
    Senator Stevens. May I interrupt?
    Chairman Collins. Yes.

              OPENING STATEMENT OF SENATOR STEVENS

    Senator Stevens. I have just been called as President Pro 
Tempore to go to the signing of some bills with the Speaker in 
the absence of the Vice President, but I want to add to that 
question. Have you studied the history of the change from CSRS 
to FERS? I was the author of FERS. It was understood at the 
time this veterans' preference would be carried forward. It did 
not have the burden of making this payment. That is something 
that has originated in this Administration, and I have notified 
the Administration time and time again that is wrong. We had an 
understanding at the time of veterans' preference.
    If you hold to this position, we have thousands of new 
people coming back as veterans now. The Postal Service would be 
forced to limit the number of veterans they qualified because 
of this added burden. Now, it shouldn't shift the burden 
because of that. It is a privilege and a benefit for the 
veterans' service, for service in uniform, and it should not 
become something of an item that is going to stall this bill, 
and it will. It will stall the bill because I don't think we 
will approve that in view of the fact there is just this 
enormous group of veterans coming back to us from this combat 
activity we have now.
    So I would urge you to rethink this. If necessary, I am 
going to ask to see the President on it, because I believe we 
had an understanding when we changed from CSRS to FERS, and we 
saved the Federal Government $8 billion in doing that. Now, 
there is no reason to shift back to the Postal Service a burden 
we did not anticipate at the time.
    I am sorry I have to go----
    Chairman Collins. Thank you for that strong statement. 
[Laughter.]
    Senator Stevens. My apologies to the Postmaster General. 
Thank you very much.
    Chairman Collins. Thank you. Senator Stevens said it far 
more eloquently than I could have. [Laughter.]
    Senator Carper. Madam Chairman.
    Chairman Collins. Senator Carper.
    Senator Carper. Do you think if Senator Stevens meets with 
the President to discuss this, that Senator Stevens will wear 
his Incredible Hulk tie?
    Chairman Collins. I think he may well, and bring both of us 
with him.
    Senator Carper. Very good.
    Chairman Collins. Seriously, this is an extraordinarily 
important issue, and we support that veterans' preference. But 
what you are doing is penalizing the Postal Service for 
following the law on veterans' preference and assuming an 
obligation that if that same veteran went to work for the vast 
majority of Federal agencies, that agency would not bear that 
cost.
    Mr. Blair. I respectfully disagree, Madam Chairman. When 
new veterans come back from the war on terror and should the 
Postal Service follow the law as mandated, they would be hired 
under the Federal Employee Retirement System retirement plan, 
and under that plan, as has been since its enactment in 1987, 
those veterans would be receiving payments under FERS, and FERS 
was a fully funded system.
    Chairman Collins. But I am not talking about FERS. I am 
talking about people who are under the old retirement system--
--
    Mr. Blair. Well, the new employees would come in under 
FERS, not CSRS.
    Chairman Collins. Right, but what I am talking about is the 
majority of the service that you are requiring the Postal 
Service to cover actually is World War II veterans, Vietnam War 
veterans, Korean War veterans, and the $17 billion is wholly 
retroactive, correct?
    Mr. Blair. Well, it is wholly retroactive. That is correct. 
It is wholly retroactive because of the $78 billion credit that 
the Postal Service received was wholly retroactive, as well. 
When we did the Postal reform legislation 2 years ago, we 
looked at the Postal Service portion of the CSRS, and pursuant 
to a GAO request, we looked at it as if it was a fully funded 
system based on the FERS model, and we found that if it was 
based on the FERS model, that the Postal Service would be 
overfunding by $78 billion. And so in granting the Postal 
Service the relief from those liabilities, the Postal Service 
assumed $27 billion in liabilities associated with military 
retirement credit.
    It is important to remember, too, that the Federal 
Government, even for CSRS employees within the Postal Service, 
is still paying $21 billion in military pension costs because 
that was--it was Postal service performed prior to 1971, when 
the Postal Service became the Postal Service, prior to that the 
old Post Office Department.
    Chairman Collins. I think it is very important that I 
clarify the record. The $73 billion that you are referring to 
was to correct an overpayment into the system. It was an 
overpayment that was being corrected, and appropriately so.
    What I am talking about in the $17 billion is the amount of 
payments that the Treasury made between 1971 and 2002. In other 
words, and would you agree that the Treasury has already made 
payments for the military service part of those Postal 
retirees' benefits?
    Mr. Blair. Remember that $27 billion----
    Chairman Collins. Could I ask you to answer the question 
and then go on?
    Mr. Blair. Certainly. Those retroactive payments were to 
cover--there were retroactive payments requested, plus 
interest, but it was made in the context of the $78 billion 
which was forgiven to them. Remember that when we did the--when 
we based it on the FERS funding model, FERS covers the entire 
cost of the retirement plan. It doesn't parse out particular 
benefits, such as retiree COLAs or spousal benefits. It picked 
up the full cost of that.
    And in going back to 1971, since that was the genesis of 
the Postal Service, we looked at that and we said, what would 
it look like if they were fully funded during that time, and if 
they were fully funded based on the payments that they had made 
up to that point, they would have--if they had continued that 
stream of payments, they would have overfunded by $78 billion. 
But in making those calculations, we also said that they would 
have to pick up costs that they hadn't previously picked up 
before because that is part of the dynamic funding that is part 
of the FERS funding model.
    So it was part and parcel--it was part of an overall, 
comprehensive package of pension reform when the Congress 
enacted it a few years ago. It can't be considered outside of 
the context of the $78 billion because it was part of that. 
Otherwise, we would have given up relief of over about $105 
billion.
    Chairman Collins. Secretary Bitsberger, how is it fair to 
ask today's Postal ratepayers, today's Postal customers, to 
reimburse the U.S. Treasury for payments that were made years 
ago, that were made between 1971 and 2002 by the Treasury?
    Mr. Bitsberger. Senator, I think that we have been very 
clear here in our prior testimony on this matter. I agree with 
Mr. Blair. The Act of 2 years ago gave the Postal Service the 
$78 billion and incorporated with that was the military 
service.
    Chairman Collins. Senator Carper, perhaps you will have 
better luck. [Laughter.]
    Senator Carper. Mr. Bitsberger, I think it is ironic that 
you are here representing the Administration--I don't say this 
in a partisan way--you are here representing an administration 
that has been part and parcel of pushing the unfunded coverage 
of Medicare to unquestioned heights. When people focus a lot 
about the unfunded liabilities that we have in Social Security, 
they are dwarfed by what we have in Medicare and the 
Administration that you are here representing today was part 
and parcel of pushing through the drug Medicare Part D program, 
which just explodes further the inability to fund Medicare. And 
you are here today literally contravening, contradicting what 
your own Presidential Commission recommended with respect to 
allowing the Postal Service to take some of these monies that 
they were in a position to recover and to pay down their health 
care costs. That may not seem ironic to you, but it seems 
terribly ironic to me. That is not a question, that is just an 
observation.
    I want to go back to what the Chairman was saying. I served 
in Vietnam. We have a lot of people who are serving in Iraq and 
Afghanistan and places around the world. My parents' generation 
served in World War II and Korea. For the life of me, I don't 
see the fairness in saying that when my generation, my parents' 
generation, or the current generation is serving the people of 
this country in harm's way in many instances around the world, 
why when they go to work at the Postal Service, we expect the 
ratepayers to pay for the pension benefits that relate to their 
service for our country, their military service for our 
country. I don't see the fairness in that. The Presidential 
Commission that our President appointed, which did a very good 
job, they don't see the wisdom in that. What are we missing?
    Mr. Blair. I don't think--I wouldn't characterize it as 
missing, but you have to keep in mind the Postal Service 
reaps--I think you would agree with me, the Postal Service 
reaps benefits through its employment of veterans.
    Senator Carper. I am sorry, would you come closer and speak 
more slowly?
    Mr. Blair. I am sorry. I think you would agree with me that 
the Postal Service reaps benefits through its employment of 
veterans. In doing so----
    Senator Carper. Why should ratepayers pay for the military 
credit, the military years that I or anybody else has spent if 
we go to work for the Postal Service? Why do the ratepayers 
have to pay that? I am sorry.
    Mr. Blair. For one, it is a cost of doing business. It is a 
cost of providing an employee benefit.
    Senator Carper. That is a cost to the taxpayers.
    Mr. Blair. It is a cost of a retirement structure that has 
benefited the Postal Service. The Postal Service, I think, 
reaps enormous benefits through its employment of veterans. I 
think that has been well recognized, and I think in FERS, it 
has never been an issue. It is just when we recalculated and 
developed a new funding mechanism for its CSRS portion that 
this has become an issue.
    Remember that under the old CSRS funding mechanism, it was 
done under a piecemeal basis. Congress mandated certain amounts 
would be picked up by the Postal Service, and that was an 
actuarially sound system, and we could have kept going under 
that system. But if you compared the old system to the FERS 
model, which is a good government model, which is a best 
practice model, you found that they would have been 
dramatically overfunding.
    But we didn't pick and choose what they would be funding. 
We said, if you want to take the benefit of our analysis, take 
the benefit of a dynamic funding process, then you take the 
whole package. You don't pick and choose bits and pieces of the 
retirement plan you want to fund and what you don't want to 
fund. It doesn't pick and choose what bits and pieces of the 
retirement plan in FERS it wants to fund.
    The Postal Service since enactment of FERS has been picking 
up the full cost of the military benefits, and I have not heard 
the discussion yet that the Postal Service should not be 
picking up that piece, either. We have a good funding model for 
CSRS. Frankly, CSRS, the rest of the government is dramatically 
underfunded in its CSRS portion, and we think that changes 
should be made about that, as well. But we have righted this 
system, and we ask Congress not to take steps that would 
underfund and be to the detriment of the retirement fund and 
future retirees.
    Senator Carper. Let me back up just a little bit. The 
Postal Service has been able to--I see we have been joined by 
General Potter. The Postal Service under his leadership and the 
Board of Governors--and thanks to a lot of sacrifice on the 
part of the employees--has been able to begin doing some 
interesting things. They have been able to start paying back 
their debt to the Treasury, paying down their debt 
substantially. I think they have been able actually to use some 
money to address the unamortized health care costs for their 
pensioners, and it is because of the work of a lot of people. 
Some are in this room, but a lot are not.
    We are in a situation where, for years, we thought the 
Postal Service was underpaying their pension obligations. Then 
we find out that no, they weren't underpaying, they are 
overpaying their obligation. So they had the opportunity to 
adjust that payment. And what they are doing is using, I 
believe, the savings from adjusting that payment to begin 
paying down their debt to the Treasury, begin meeting their 
health care obligations. What is wrong with allowing them just 
to go ahead and do that?
    Mr. Bitsberger. Senator, we view this as the principles for 
self-financing and the model for self-financing. I think that 
what we are trying to do is be able to mitigate future rate 
increases by acknowledging that these future unfunded 
liabilities exist. I think it is important to note that we need 
to kind of disassociate the escrow from the proposed rate 
increase for 2006.
    No one wants to see a rate increase here. What we are 
trying to do is mitigate and lower future rate increases by 
acknowledging that that escrow can be suitably used to pay down 
these future unfunded liabilities.
    Senator Carper. Madam Chairman, my time has expired. I am 
going to slip out of the hearing for a little bit. I will be 
right back.
    Chairman Collins. Thank you.
    Senator Carper. Thank you.
    Chairman Collins. I am going to pursue this issue a little 
bit further. Mr. Blair, in your statement, you used the Patent 
and Trademark Office as an example of an agency that now was 
going to be required to pay the full costs of the CSRS 
benefits, including the military service credit. Isn't that on 
a prospective basis?
    Mr. Blair. Yes, it is.
    Chairman Collins. Do you know of any other entity, other 
than the U.S. Postal Service, that is required to bear this 
cost retroactively?
    Mr. Blair. I would have to look--I would have to answer 
more specifically for the record, but I am not aware of any, 
but I am not aware of any other entity that has had the benefit 
of a pension analysis to look at their previous payments to 
determine that kind of overfunding, which the Congress 
addressed 2 years ago, either.
    Chairman Collins. Well, I would say that the Committee 
staff has done an extensive analysis and we know--the Committee 
knows of no other agency or Federal entity belonging to the 
CSRS system that is bearing this cost retroactively. I believe 
that your further review will confirm that the Postal Service 
is unique, but I do look forward to hearing back from you on 
that point.
    Mr. Blair. I think the main point on that is that you can't 
consider those retroactive payments outside the scope of the 
retroactive benefit that was afforded the Postal Service in 
terms of the $78 billion. We looked at those payments that they 
had made and we went back to 1971 and credited them with past 
interest. No other agency made payments like that. So they are, 
indeed, unique in that respect. But to argue that--they are 
going to get the benefit of retroactive interest credits, then 
they need to pick up the liabilities associated with past 
payments that they did not make.
    Chairman Collins. Well, let us talk about that. In other 
words, Postal customers past, present, and future have paid, 
and under the law will continue to pay, too much in rates to 
the tune of $73 billion, or your figure is $78 billion. What I 
hear you saying today is you want that $73 to $78 billion to 
keep flowing into the Treasury, at least in the short term, so 
that it can be used for anything and everything wholly 
unrelated to the Postal Service and affecting a $900 billion 
mailing industry that is critical to our economy.
    Mr. Blair. What we would propose, and as you have in your 
bill, is a post-retirement health benefits fund that that money 
would flow to to begin recognizing almost $64 billion in 
accrued liabilities and to prevent future rate cases, not just 
the 2006 rate case, but future rate cases and future ratepayers 
from having to suffer a huge hit that would be required in 
order to make payments on a pay-as-you-go basis under the 
system that was previously in place.
    Chairman Collins. As you know, our bill does call for 
prefunding some retiree health benefits, but we don't say that 
every dollar has to go for that purpose, which is the 
Administration's position. Instead, we recognize that the 
Postal rate consumer, who has been overpaying, ought to share 
in this funding and that would help the Postal Service avoid 
rate increases that really are not warranted if this problem 
were straightened out.
    Secretary Bitsberger, let me ask you, has the Treasury done 
any economic analysis of the impact of the rate increases 
proposed by the Postal Service, rate increases that would not 
be necessary if this bill becomes law?
    Mr. Bitsberger. Not per se. The rate increase that they 
proposed was 5.4 percent. I believe the CPI over the 
corresponding period, from June 2002 to the corresponding date, 
is roughly up 12.4 percentage points. So they are well within a 
CPI cap if that had existed previously. So the Postmaster 
General should be commended for staying well under CPI.
    I think that the harm, if there is any harm to the economy, 
it would come in the future where large unfunded liabilities 
could cause unpredictable and excessive rate increases. I think 
the ability to--and through the transparency have the hard CPI 
cap combined in concert with the escrow will allow the Postal 
Service to best manage its costs and its liabilities together 
over time, further mitigating any potential--any rate increases 
on the economy at that point in time.
    Chairman Collins. You know, I would really encourage you to 
look at the hearing records from the eight hearings that we 
have held on this issue. I think you would be astounded to 
learn of the impact of Postal rates on so much of the economy. 
The CEO of Time Magazine, for example, testified that postage 
is her single largest line item. It is more than the cost of 
the paper that Time Magazine is printed on. It is more than the 
cost of printing the magazine. It is more than the labor costs, 
which probably dismays some of their reporters.
    It has an enormous impact. I gave you the example of a 
small manufacturer in Maine who had a catalog company and thus 
could not increase prices because they had already been printed 
in the catalog. I really urge you to think more thoroughly 
about the economic impact of Postal rate increases. It ripples 
through the entire economy. It affects a $900 billion mailing 
industry. It affects everything from catalog companies to 
newspaper publishers to credit card companies, anyone who is a 
heavy user of the mails. And that means ultimately it affects 
jobs, and that is what it is all about.
    So I just want to encourage you all to continue to work 
with us. I do thank you, and I hope you do acknowledge that the 
Committee's bill this year is different from last year. We 
incorporated many suggestions from the Administration that I 
believe strengthen the bill, such as the transparency 
provisions, the SEC-like disclosure provisions, the CPI cap. I 
can tell you that the Postal Service is not always happy that 
we included all of those provisions. The Postal Service is 
vital and the Administration needs to come up with potential 
compromises on the remaining issues about which we disagree.
    Mr. Bitsberger. Thank you, Senator. I would like to thank 
you and your staff for working so closely with us on this. I 
think that real progress has been made and we are very 
encouraged by all the progress to date, so thank you and your 
staff and others, as well.
    Chairman Collins. Thank you. I want to thank this panel for 
being here today. We look forward to continuing to work with 
you to resolve the remaining issues to the Committee's 
satisfaction.
    I would now like to welcome our second panel of 
distinguished witnesses to the hearing. Postmaster General Jack 
Potter has testified before this Committee at one of our very 
first hearings on Postal reform back in November 2003, and we 
appreciate the expertise he brings to this issue.
    David Walker is the Comptroller General of the Government 
Accountability Office. He is perhaps our most frequent witness 
before this Committee, and the insights that he and the GAO 
staff bring to our proceedings are always appreciated.
    I want to thank the Postmaster General for changing his 
schedule to be here today. I know that he was previously 
scheduled to be, I believe, in Texas before a large group of 
Postal customers, and we very much appreciate his rearranging 
his schedule. I would ask him to proceed.

 TESTIMONY OF HON. JOHN E. POTTER,\1\ POSTMASTER GENERAL, U.S. 
                         POSTAL SERVICE

    Mr. Potter. Madam Chairman, I did make it to Houston, 
Texas, and thanks to some very considerate customers of ours, 
we had a nice 7:45 a.m. conference, so I did get an opportunity 
to speak to over 500 customers down there, so thank you for 
having this hearing in the afternoon that enabled me to do 
that. I appreciate it.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Potter appears in the Appendix on 
page 45.
---------------------------------------------------------------------------
    And good afternoon, Madam Chairman. Thank you for this 
opportunity to continue the critical discussion about the need 
for comprehensive Postal reform legislation. I want to thank 
you in particular for your personal commitment toward this 
effort. I am also grateful to Senator Carper and the other 
Members of the Committee for their support and hard work to try 
to move us closer to legislation that will protect and preserve 
universal mail service for all Americans well into the future.
    As the process toward legislative reform has continued to 
advance, the Postal Service has continued to pursue the goals 
outlined in our transformation plan, that is, to improve 
service and bring about changes that are within the framework 
of our current legislation. I have included a detailed report 
of the progress that we have made over the last 4 years for the 
record. Suffice it to say, we are transforming the Postal 
Service. We continue to develop new ways to improve service, to 
reduce our costs, to increase efficiency, and add value to the 
mail. We are currently updating our transformation plan to 
include initiatives for improvements that will carry us through 
2010.
    Yet despite our best efforts to transform the Postal 
Service, these successes only mask the underlying dilemma that, 
in the future, jeopardizes our ability to continue to provide 
affordable universal mail service to the American public. To 
put it plainly, we are seeing continued erosion of high-margin 
First-Class Mail, which the framers of the Postal 
Reorganization Act viewed as the primary revenue source to 
support the national commitment to universal mail service.
    First-Class Mail volume dropped 6 billion pieces from 2001 
to 2004, mostly due to the diversion to electronic 
alternatives. This diversion threatens to siphon off a 
significant segment of First-Class Mail that contains financial 
transactions, most commonly bills, statements, and payments, 
which last year accounted for about 50 percent of all First-
Class Mail. The potential loss of revenues from financial 
transactions could run as high as $16 billion annually.
    On the other side of the ledger, our expenses continue to 
rise. Our delivery network continues to grow annually at about 
1.8 million new addresses, which requires added delivery 
routes, additional employees, added vehicles, and thus 
increased costs. The net effect is that we are delivering fewer 
pieces of First-Class Mail to more addresses.
    This dilemma is compounded by the fact that the business 
model created by the Postal Reorganization Act of 1970 does not 
provide the flexibility and mechanisms needed to resolve this 
imbalance going forward. At some point, we will simply run out 
of acceptable options, which heightens the urgency for Postal 
reform legislation in a new business model, one that will give 
us the tools we need to break through this logjam and give us 
the flexibility we need to operate in a more businesslike 
manner.
    It is with that sense of urgency that I want to reiterate 
the points cited by the Board of Governors of the Postal 
Service last month as key components of Postal reform 
legislation.
    First, in the matter of the escrow requirement and the 
military service requirement obligation in Public Law 108-18, 
we maintain that the escrow provision should be eliminated and 
that the Civil Service Retirement System military obligation 
should be returned to the Department of the Treasury. 
Therefore, we support the provision of the Postal 
Accountability and Enhancement Act, S. 662, which returns the 
military obligation to the Treasury and creates a deposit of 
$17 billion in a retiree health benefit trust fund and provides 
a 40-year amortization payment schedule to fund retiree health 
benefits.
    Second, comprehensive legislative reform should incorporate 
changes in the area of labor, which accounts for almost 80 
percent of our cost. Provisions in S. 662 that make changes to 
workers' compensation are very much appreciated. However, under 
current law, about 25 percent of our compensation costs, that 
is, benefits portion, are exempt from collective bargaining. We 
are not seeking to cap or restrict craft employee wages. 
Rather, I believe wages, benefits, working conditions all 
should be negotiated with our unions. We also believe that the 
regulator should not--I repeat, not--be given the power to 
determine the range within which wages can be negotiated.
    Third, the Postal Service should be granted the authority 
to change rates and introduce new Postal services both with the 
approval by the Board of Governors and within a price range 
determined by the regulator without prior approval. If the 
Postal Service had the authority to adjust rates within a 
predetermined range, we believe that CPI could serve as an 
acceptable, though challenging, price cap.
    Let me add that a price cap formula must have balance, 
balance that provides management with flexibility in pricing, 
with freedom to modernize infrastructure, with the ability to 
negotiate costs, be they employee benefits, vendor contracts, 
or air transportation charges. Balance in any price cap formula 
should also set standards that allow management to accommodate 
unforeseen economic pressures, such as escalating energy prices 
or steep, dramatic reductions in mail volume. To that end, the 
inclusion of a reasonable exigency provision is essential in 
any bill that provides for a CPI rate cap.
    Chairman Collins, we also appreciate very much that S. 662 
calls for the application of the price cap at the class level.
    Finally, with regard to any future changes in the scope of 
the Postal monopoly, we believe that the Congress, not the 
regulator, should determine the appropriate national public 
policy within the context of the Postal Service's universal 
service mission and other social obligations.
    Chairman Collins, we are ready, willing, and able to step 
up to the challenges that confront us in the years ahead. At 
the same time, we do not want to return to the days prior to 
Postal reorganization when America's mail system was dependent 
on an annual infusion of tax dollars to make ends meet. But 
neither can we rely on a 34-year-old business model that was 
created at a time when there was no national competition or 
competitive services nor electronic alternatives, and when it 
was assumed that First-Class Mail volume would continue to 
increase to support a continually growing delivery network.
    The long-term solution must be a fundamental restructuring 
of the legislative and regulatory framework. Effective and 
meaningful reform can only be achieved if it provides balanced 
solutions to the complex problems we continue to face. A 
piecemeal approach will not get us to where we need to be 10 
years down the road. There is an essential interdependency that 
exists between the key legislative components that I have 
described.
    The current bill must strike a reasonable balance between 
necessary controls and essential freedoms and flexibility we 
need to bring about real reform. Those key elements are the 
flexibility to use pricing as a tool to remain competitive and 
to grow the business; the flexibility to provide new services 
and products that will meet the changing business needs of the 
Nation and the needs of the American consumer; the ability to 
negotiate all employee benefits; the ability to manage our 
infrastructure and adjust our networks to keep our costs under 
control; and a regulatory environment that protects the 
interests of our competitors and addresses issues of 
transparency, but one that also fosters innovative changes and 
more efficient processes instead of more bureaucratic 
entanglements that can only retard progress.
    At the end of the day, with these legislative components to 
guide us, we will be able to continue to provide affordable 
universal mail service to the American public well into the 
future. Along with the Governors of the Postal Service, I look 
forward to working cooperatively with you, with the House, with 
the Administration in this vital and critical work of defining 
the reform measures necessary to head off the dire consequences 
that await us all if we fail in our task.
    Thank you, and I will be pleased to answer any questions 
you may have.
    Chairman Collins. Thank you. Mr. Walker, we are very 
pleased to have you here today. Given your great understanding 
of financial issues, I hope you can shine some light on our 
previous discussions and we look forward to your testimony.

 TESTIMONY OF HON. DAVID M. WALKER,\1\ COMPTROLLER GENERAL OF 
    THE UNITED STATES, U.S. GOVERNMENT ACCOUNTABILITY OFFICE

    Mr. Walker. Chairman Collins, I think I can help you in 
that regard. Let me at the outset say thank you for the 
opportunity to be back before this Committee to once again 
speak about the need for Postal reform. Congratulations go to 
you and Senator Carper for your leadership in this regard. I 
think you and your staff have done an outstanding job to date, 
and I am hoping that we can bring this ship home before too 
long.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Walker appears in the Appendix on 
page 64.
---------------------------------------------------------------------------
    I would respectfully request that my entire statement be 
included in the record.
    Chairman Collins. Without objection.
    Mr. Walker. Thank you. Therefore, I will move to summarize.
    The Service has made significant progress since fiscal year 
2001, including achieving record net income, repaying debt, 
achieving additional productivity increases, and downsizing the 
Postal workforce. I think the Postmaster General, Jack Potter, 
ought to be commended for the work he and his key players have 
done at the Postal Service. They have really done an excellent 
job with the flexibilities that they have.
    However, I think it is also important to note that most of 
the net income that occurred was due to the passage of the law 
in 2003 that corrected the formula for contributions for 
pensions. As you properly pointed out, Madam Chairman, the 
situation there was to correct the formula to make sure that 
the Postal Service paid for its full obligations, not more and 
not less. I will come back to the issue of military service in 
a few minutes, with your indulgence.
    Despite the progress that has been made, comprehensive 
Postal reform legislation continues to be needed in order to 
address certain fundamental financial, operational, governance, 
and human capital challenges that continue to threaten the 
Service's long-term ability to maintain a self-supporting 
structure while providing high quality and universal Postal 
service at an affordable cost. The Postal Service has done a 
lot; however, many things remain to be done. This sounds like a 
typical GAO report. But they are going to need your help, 
because there is absolutely no question that legislative reform 
is still needed in several areas.
    Certain key areas for Postal reform include clarifying the 
Service's mission and role so that the Service remains focused 
on universal Postal service and competes appropriately; 
enhancing the Service's flexibility to operate in a 
businesslike manner with a governance structure suitable for a 
$70 billion entity, balanced by enhanced transparency, 
accountability, and oversight. The Service also needs to make 
needed human capital reforms and move toward prefunding certain 
significant post-retirement obligations, in particular their 
retiree health obligations.
    Madam Chairman, postal reform is needed to address the 
following key areas. Mission and role--to clarify the Service's 
mission because the current law has enabled the Service to 
engage in unprofitable activities that are unrelated to its 
core mission, as well as to clarify the Service's role in 
competing fairly, including its monopoly power, its authority 
to regulate the scope of its own monopoly, and other terms of 
competition.
    Second, governance, transparency and accountability. 
Congress needs to delineate the Service's public policy, 
operational and regulatory responsibilities. It needs to ensure 
managerial accountability for a strong, well-qualified 
corporate-style board that holds its officers responsible and 
accountable for achieving results, not just currently, but over 
time, and to define appropriate reporting mechanisms to enhance 
the Service's transparency and accountability for its financial 
and performance results.
    With regard to flexibility and oversight, Congress needs to 
balance increased flexibility for the Service to operate in a 
business-like manner through streamlining the rate-setting 
process and allowing a certain amount of retained earnings 
while enhancing oversight by an independent regulatory body to 
protect Postal customers against undue discrimination, restrict 
cross-subsidies, and ensure due process. In addition, the 
Service needs additional flexibility and incentives to 
rightsize its infrastructure and reshape its workforce. Such 
additional flexibility in these areas should be balanced by 
safeguards to prevent abuse as well as to enhance transparency, 
accountability, and oversight, starting with appropriate 
disclosure of the Service's large financial liabilities and 
obligations, much of which are currently not on the Service's 
balance sheet.
    Human capital reforms and pension benefit costs are also 
important. Congress needs to consider legislative proposals 
that will revise the Service's current responsibility for 
pension costs related to military service. In that regard, 
Madam Chairman, two concepts that I would respectfully request 
that this Committee and the Congress consider, which also apply 
in accounting. The first concept is matching. The second is 
consistency.
    With regard to matching, who benefited from the military 
service? The cost should be matched with the party who 
benefited from the military service. I would argue that all 
Americans benefited from the related military service.
    And second, consistency. To what extent are other entities 
that are government corporations required to bear such costs? 
For example, neither the PBGC, which I used to head, nor the 
FDIC, which we do the audit for, have responsibility for these 
military service costs.
    So I would respectfully suggest you may want to consider 
the concepts of matching and consistency, and I would 
respectfully suggest that the Administration needs to do the 
same.
    I think we also need to move toward prefunding of retiree 
health benefits and the need to abolish the escrow account 
established in recent postal legislation.
    In any event, progress continues to be needed toward a more 
flexible, contemporary, performance-oriented, market-based 
compensation system for all Service employees consistent with 
proven approaches in the human capital area. In that regard, I 
would note, Madam Chairman, that there is nothing in the 
current bill that deals with the pay comparability issue, which 
I think is a very real and important issue. There is also 
nothing in the current bill that deals with the issues that the 
Postmaster General touched on, namely the ability to negotiate 
benefits, which represent a major and growing portion of total 
compensation, given health care and other types of costs.
    In closing, let me again compliment you, Madam Chairman, 
and also Senator Carper on your leadership in this area. I have 
had an opportunity to look at S. 662 and consult with my staff. 
Based on the work that has been done to date, I think you have 
come up with a reasoned and reasonable framework for Postal 
reform. There absolutely is a need for Postal reform, and we 
look forward to working with you, your staff, and others to 
make Postal reform become a reality in this Congress.
    Thank you, Madam Chairman.
    Chairman Collins. Thank you very much, Mr. Walker.
    The two principles that you laid out for the Committee of 
matching and consistency are very helpful guidelines for us to 
follow, and I appreciate your suggesting those guidelines to 
us.
    Mr. Walker, I just want to reemphasize a point that you 
made, and that is despite the hard work of the Postmaster 
General, the employees of the Postal Service, and the managers 
of the Postal Service, Postal reform is still very much needed. 
This cannot be done just administratively.
    Last time you testified before us, you said that if we do 
not act, the risk is that we will face either dramatic rate 
increases with the resulting detrimental impact on the economy, 
or the risk of a significant taxpayer bailout if legislation is 
not enacted. Is that still your assessment?
    Mr. Walker. That is still true, Madam Chairman, and I would 
also note that there are some analogies here between the Postal 
Service and Social Security. If we take last year, for example, 
the Postal Service ran about a $4 billion surplus, I believe--
--
    Mr. Potter. Three.
    Mr. Walker. Three. Well, I am sorry, Jack. [Laughter.]
    He did a great job, but not quite as good as I thought. 
[Laughter.]
    So a $3 billion surplus. Social Security ran a $151 billion 
surplus. But if you look in the out years, based upon known 
commitments and obligations, and in the case of the Postal 
Service, these huge retiree health obligations, which have gone 
up since the last time that we talked, these are temporary 
surpluses. There is absolutely no question that reform is 
necessary, and if reform doesn't come, those two possible 
undesirable outcomes are still real possibilities.
    Chairman Collins. Thank you. I think that is a very 
important point, and I have heard you also make this point with 
regard to entitlement programs in general, that the longer we 
delay, the more difficult it is to put the Postal Service on a 
firm financial footing so that it can go forward. So sooner 
rather than later, I assume, is also better.
    Mr. Walker. I agree, and there is another important point, 
Madam Chairman. Namely, nobody likes a rate increase. Nobody 
likes a tax increase. Nobody likes a fee increase. However, I 
think that we have to recognize reality. I believe it is better 
to be able to have modest, moderate, and predictable postal 
rate increases so the private sector can manage their costs, 
rather their experience large, unpredictable, and more frequent 
rate increases.
    Therefore, I commend the Committee for recognizing that 
while relief on the pension side has occurred, and you 
obviously have to decide what to do with military pensions, 
there is a need to begin to fund the retiree health obligations 
because in the absence of doing that, you are going to create 
tremendous pressure for much larger and more frequent increases 
in the future absent taking that step.
    Chairman Collins. Thank you. You know, as I was listening 
to our previous witnesses, I couldn't help but think that in 
some ways, this is a shell game. It is not as if the escrow 
account would be transferred to a Bank of America account 
marked ``U.S. Postal Service.'' It is really a matter of Postal 
ratepayers subsidizing the current Federal balance sheet.
    Mr. Walker. Well, unfortunately, as you know, we are 
investing in most cases in trust funds or escrow accounts in 
non-readily marketable government bonds that are backed by the 
full faith and credit of the U.S. Government, but in the end, 
those bonds have to be paid off. In order to pay them off, you 
have to raise revenues, cut other spending, or increase debt 
held by the public. And as you properly pointed out before, we 
are currently on an imprudent and unsustainable fiscal path. It 
would be great if we could help the Postal Service be better 
positioned for the future. Quite frankly, while Postal reform 
is a challenging undertaking, it is a modest undertaking 
compared to Social Security, Medicare, and other types of 
challenges that we face.
    Chairman Collins. Mr. Potter, the previous witnesses 
referred to a rationale for treating the Postal Service 
differently that was based on the Postal Service having 
received billions of dollars in appropriations. It is my 
understanding, however, that the $9 billion that was a public 
service appropriation that was authorized in the 1970 Act has 
not been requested or received since 1982 and that the limited 
funding that the Postal Service has received from the Federal 
Treasury has been based on public policy written into law, for 
example, to cover the mandate that we have required for reduced 
rates for mailings to people who are blind, for example. Is 
that correct? I just think it is really important we clarify 
this.
    Mr. Potter. That is absolutely correct. Since 1982, we have 
not asked for an appropriation to help us provide delivery 
services, and it is our intent, and I know it is the intent of 
this Committee, not to have the Postal Service get into a 
position of having to ask for that in the future. That is why 
it is so essential that we make these changes now, to avoid 
that calamity.
    Chairman Collins. And with the exception of federally 
mandated rates, such as in that area, the goal really should be 
that the Postal Service does not subsidize the Treasury and the 
Treasury does not subsidize the Postal Service. I mean, it goes 
both ways, does it not?
    Mr. Potter. I hope so. [Laughter.]
    They have a little more power than we do.
    Chairman Collins. I can understand why the previous 
testimony might create some doubt in your mind, since it 
essentially was proposing that the Postal Service and its 
customers subsidize the Treasury, which is disturbing and 
unacceptable to me.
    If this legislation passes, what would be the impact, if 
you can comment on this, on the pending rate case?
    Mr. Potter. Well, it would be a function of what is passed. 
For example, if the Senate bill were passed, obviously, there 
would still be a cost in 2006 that we don't bear today. That 
cost would be slightly lower than what is in the escrow 
account. So we might modify that rate increase slightly. But 
the beauty of what has been proposed in the Senate is that the 
costs going forward are linked to our health benefit 
obligations. So in effect, you have a flat payment stream----
    Chairman Collins. Like a mortgage, in some ways.
    Mr. Potter. Like a mortgage, and it is amortized over 40 
years, and it is reevaluated, actuarially reevaluated, year by 
year. But in effect, you have a flat payment stream, like a 
mortgage.
    Paying or repaying the escrow money into a health benefit 
fund, there is no linkage to the cost for health benefits and 
that payment would rise every year and that increased payment--
it would start at $3.1 billion in 2006 and rise to over $7 
billion in 2010--each year, that puts added pressure on rates 
and on the Service.
    So the notion that the military obligation remains in the 
Treasury, that the excess funds serve as a downpayment on, or 
serve as, in effect, the downpayment or as capital that is now 
available for future retiree health benefits and that we add to 
that every year is a notion that we embrace, and we embrace the 
model that has been proposed under S. 662 as one that is very 
workable for the Postal Service. It addresses our long-term 
obligation. At the same time, it is done in a way that does not 
put rate pressure on every year after year. It builds it into 
the base and it allows for it to continue going forward.
    Chairman Collins. Finally, before I turn to my colleague 
for his questions, could you give us a better understanding of 
the economic impact if rates spiral upward, say double-digit 
rates, which we were very worried about a year ago?
    Mr. Potter. Well, let me first give credit to all of the 
Postal employees for their hard work in changing our processes 
and embracing the notion that we had to become more efficient. 
Their hard work, their efforts have enabled us to avoid a 
double-digit rate increase, and I think part of the motivation 
was that we explained to them that a double-digit rate increase 
would have mail moving away from hard copy to other media, and 
they understood that and they recognized that was a challenge 
that we faced. They embraced the notion of that challenge and 
they got on board when it came to making adjustments to our 
system to increase value of the mail. That was not only from a 
cost side, but a service side.
    But each product that we have has an elasticity, and so as 
we raise rates, if we have a double-digit rate increase in, for 
example, Priority Mail, we can expect a double-digit loss in 
volume. And so our products are very sensitive to price. People 
make decisions, for example, on advertising. Do they use the 
mail? Do they use radio? Do they use television? Do they use 
newspapers? And they do calculations based on cost and return.
    So anytime you see a dramatic jump in price, obviously, it 
affects the economics of using the mail versus using 
alternatives, and we don't have the monopoly that we had in the 
past because there are alternatives to every product and 
service that the Postal Service has.
    Chairman Collins. I think that is a very important point 
for me to end my questioning on. It brings to mind the 
memorable phrase of Mr. Walker in which he described the 
potential death spiral of the Postal Service, where you 
increase your rates sharply. Volume then falls, but you are 
still serving the same number of addresses, so then you have to 
increase your rates to cover your costs. Volume falls again. 
That is what we must avoid, and that is why I am so committed 
to getting this legislation passed. I believe it will give you 
the tools you need to have affordable, predictable rates, and 
that is really key.
    Senator Carper.
    Senator Carper. Thanks, Madam Chairman. I understand that 
the gentlemen had an opportunity to respond to some of the 
comments of the previous panel with respect to military 
service?
    Chairman Collins. Yes.
    Senator Carper. Did this panel acquit themselves pretty 
well?
    Chairman Collins. They did, indeed. [Laughter.]
    You will be surprised to learn that they have a different 
view. [Laughter.]
    Senator Carper. Well, I am surprised. No, not really.
    Gentlemen, welcome. Thanks very much. I had an opportunity, 
General Walker, to talk with the other General, General Potter. 
These generals, it is almost like an Armed Services Committee 
hearing. [Laughter.]
    Mr. Walker. You don't have to salute us, though, Senator. 
[Laughter.]
    Senator Carper. Well, I do anyway.
    About the growth in one of the products, it is actually a 
fairly new product, what do you call it, where people have 
somebody come by, their letter carrier come by----
    Mr. Potter. Click and ship?
    Senator Carper. What is it called?
    Mr. Potter. Click and ship, where people can get online 
and----
    Senator Carper. Just take a moment and share with us again 
the growth in that product, the acceptance by households and 
businesses.
    Mr. Potter. Well, we have seen a dramatic increase in the 
amount of people who get online, access our website to produce 
labels for any packages that they have. They pay for postage. 
We give them the opportunity, since for security reasons we 
can't allow them to put packages in collections boxes, the 
opportunity to tell us that they have a package and they would 
like our carrier, or their carrier, to stop by and pick up 
their package the next day. They can get insurance online for 
that package. They can put tracking and tracing on that 
package.
    And what we are seeing is, again, a dramatic increase in 
the amount of folks that are using that service. On a daily 
basis, we are picking up thousands of packages that in the 
past, we wouldn't have been able to provide the convenience to 
our consumers, to our customers. So we basically use the 
Internet to provide services, another means of access to 
provide services for our customers where they live, where they 
work, and I think we have--probably are uniquely suited to 
provide that, since we are at every door every day.
    Senator Carper. When I heard that, it was kind of an 
``aha'' moment for me. I said, that is it. I don't know if that 
is the future, but that is part of the future, and it is the 
kind of creativity that we are looking for. Whatever smart 
people within or outside the Postal Service who came up with 
that idea and who have nourished it and grown it, I just say, 
keep it up.
    A couple of questions. I will start, if I could, General 
Walker, with you. First of all, a question or two about the 
rate cap. The rate cap that we have included in S. 662 takes, 
we believe, into account some of the Postal Service's main cost 
drivers, I guess such as fuel, such as employee health care 
costs. We believe it takes those into account sufficiently, and 
I would just ask your take on that.
    Mr. Walker. Let me commend you, along with Chairman 
Collins, for your leadership in this area. I think you have 
done a great job of getting to where we are right now.
    Senator Carper. We are only as good as our staff, and we 
have had excellent staff people.
    Mr. Walker. And your staff, too. That goes without saying. 
I did say that before, but you are right to----
    Senator Carper. I really appreciate your saying it again, 
too.
    Mr. Walker. My understanding is your rate cap is CPI, and 
you can't do anything other than CPI unless it is unexpected 
and extraordinary. The only concern that I have, and I haven't 
run the numbers on this and I don't know if your staff has run 
the numbers on this, is obviously we don't know how the issue 
is going to come out on military retirement, but we know that 
there is a huge number for retiree health care.
    I think one of the things that is important to look at is 
to make sure that the known costs for retiree health care are 
considered with regard to this cap. It is known. It is 
expected. It is not extraordinary. And so, therefore, I would 
hope that this cap would be able to consider that known, 
expected, and non-extraordinary item. I just haven't run the 
numbers. I do, however, think the concept of having a cap is 
one that has significant conceptual merit.
    Senator Carper. Just sort of related, assuming that the 
rate cap in S. 662 is actually enacted into law, other than the 
point you just raised, are there any other impacts that come to 
mind that are going to have an adverse effect, particularly 
adverse effect, on Postmaster General Potter, his successors, 
or others that work with him? Anything else that comes to mind?
    Mr. Walker. There are two areas that I mentioned before, 
Senator, that are not currently in S. 662 which I would 
respectfully suggest that you consider.
    One is the issue of pay comparability. That is a real and 
important issue.
    The second is the issue of being able to bargain over total 
compensation, which includes benefits. Benefits are becoming an 
increasingly significant percentage of total compensation, and 
they are a big driver to long-term cost. I would respectfully 
suggest, as Postmaster General Potter alluded to, that all 
individuals who work for the Postal Service have a shared 
challenge and have a mutuality of interest to try to make sure 
that this business model is modified as necessary and that 
costs are moderated going forward. A big part of the costs of 
the Postal Service are compensation costs, and compensation 
costs aren't just pay, they are also benefits. I would 
respectfully suggest that these are two issues you may want to 
think about. If you don't have a cap, I think it is going to be 
even more important that you consider them.
    Senator Carper. If I could just stay with this rate cap, 
General Potter, for just a little bit longer, you stated in our 
meetings, and I think probably here today before I got here, 
that the Postal Service could probably live within a rate cap 
based on CPI but that you need more ability to break from that 
rate cap from time to time than is inherent in the provision in 
our bill.
    Let me just ask, under what circumstances do you think the 
Postal Service might need to break the rate cap, and the second 
question is, why can't the kind of cost drivers that might lead 
to your breaking the rate cap be accounted for in a rate that 
falls under the CPI-based cap?
    Mr. Potter. Senator, the biggest challenge we have is the 
loss of volume, and I think as I alluded to in my opening 
remarks and as Chairman Collins alluded to in her spiral 
discussion, the loss of volume is really the challenge that we 
are most concerned about when it comes to the future.
    We are anticipating that there will be a normal decline in 
volume, or relatively graduated decline in volume versus a 
steep decline. If there were to be a steep decline in volume in 
any given year, that would be something that would put a lot of 
pressure on the Service, and one of the options should be to go 
back to the regulator and seek relief.
    I would like to pick up on a point that General Walker just 
talked about and that is the notion of our acceptance or our 
commitment and our agreement to go ahead with CPI. One of the 
expectations of that agreement was that we were going to have a 
flat payment schedule when it comes to contributions to retiree 
health benefits. Just think about the numbers.
    In 2006, our payment under the Administration's proposal 
will be $3 billion. In 2016, it will be $7 billion. So, in 
effect, every year, that payment is going up, on average, $400 
million. Well, where is that coming from? That is--$400 million 
on a $70 billion base is better than half a percent. So if you 
are capped at CPI and a half a percent is already earmarked for 
retiree health benefits, and then on top of that, under their 
proposal, you are paying for retiree health benefits and they 
are rising at 15 percent a year, and our employee health 
benefits are rising, the people on the rolls are rising 7 to 12 
percent per year, you start to realize that there are a lot of 
costs that are above inflation.
    And so the notion going forward, if we could look ahead and 
say, is everything rising at inflation? Well, the fact of the 
matter is, it is not. It is rising above inflation in many 
areas, and we recognize, as was stated earlier, there are 
efficiencies that can be gained. We want to aggressively pursue 
them. There are mechanisms to raise revenue. We are looking for 
pricing freedom to do that. And what we are trying to seek is a 
balance, a balance between those cost drivers that are above 
inflation and our ability to mitigate costs and become more 
efficient and change our processes.
    But there will come a time when they don't match. What lies 
in the balance? In my mind, I see it as a three-legged stool. 
There is revenue, there is cost, and then there is service, and 
we want to keep those three things in balance as best we can, 
and there may come a time when, not because of something that 
is extraordinary but just kind of in the normal business flow, 
business cycle, would have us want to exceed a CPI cap.
    I don't envision it in the next 3 to 5 years, but I think 
if we put our caps on and say, what is going to happen 15 years 
from now, I think it is easy to envision that whoever is 
running the organization might seek and need to seek that 
relief.
    Chairman Collins. I want to thank our witnesses for being 
here today. It has been very helpful to have your testimony.
    Senator Carper and I are very committed to getting this 
legislation signed into law this year and we are going to need 
your help and your advice and expertise as we continue to work 
on this important legislation. I do want to thank all of our 
witnesses for being here today.
    This Committee has made Postal reform a priority. It 
remains a top priority for us, and we will be moving forward on 
this. The only other issue that we have had as many hearings on 
as this issue was the intelligence reform bill, and that became 
law when people didn't think that it would, also. So I am 
equally committed to getting this bill signed by the President.
    The hearing record will be held open for 15 days for the 
submission of questions or other materials.
    I do want to join my colleague in thanking the Committee 
staffs and your staffs for their hard work.
    This hearing is now adjourned.
    [Whereupon, at 3:53 p.m., the Committee was adjourned.]


                            A P P E N D I X

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