[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]





  WHERE HAVE ALL THE LETTERS GONE? THE MAILING INDUSTRY AND ITS FUTURE

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

                                HEARING

                               before the

                   SUBCOMMITTEE ON FEDERAL WORKFORCE,
                  U.S. POSTAL SERVICE AND LABOR POLICY

                                 of the

                         COMMITTEE ON OVERSIGHT
                         AND GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 12, 2011

                               __________

                           Serial No. 112-53

                               __________

Printed for the use of the Committee on Oversight and Government Reform









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                      http://www.house.gov/reform


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              COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

                 DARRELL E. ISSA, California, Chairman
DAN BURTON, Indiana                  ELIJAH E. CUMMINGS, Maryland, 
JOHN L. MICA, Florida                    Ranking Minority Member
TODD RUSSELL PLATTS, Pennsylvania    EDOLPHUS TOWNS, New York
MICHAEL R. TURNER, Ohio              CAROLYN B. MALONEY, New York
PATRICK T. McHENRY, North Carolina   ELEANOR HOLMES NORTON, District of 
JIM JORDAN, Ohio                         Columbia
JASON CHAFFETZ, Utah                 DENNIS J. KUCINICH, Ohio
CONNIE MACK, Florida                 JOHN F. TIERNEY, Massachusetts
TIM WALBERG, Michigan                WM. LACY CLAY, Missouri
JAMES LANKFORD, Oklahoma             STEPHEN F. LYNCH, Massachusetts
JUSTIN AMASH, Michigan               JIM COOPER, Tennessee
ANN MARIE BUERKLE, New York          GERALD E. CONNOLLY, Virginia
PAUL A. GOSAR, Arizona               MIKE QUIGLEY, Illinois
RAUL R. LABRADOR, Idaho              DANNY K. DAVIS, Illinois
PATRICK MEEHAN, Pennsylvania         BRUCE L. BRALEY, Iowa
SCOTT DesJARLAIS, Tennessee          PETER WELCH, Vermont
JOE WALSH, Illinois                  JOHN A. YARMUTH, Kentucky
TREY GOWDY, South Carolina           CHRISTOPHER S. MURPHY, Connecticut
DENNIS A. ROSS, Florida              JACKIE SPEIER, California
FRANK C. GUINTA, New Hampshire
BLAKE FARENTHOLD, Texas
MIKE KELLY, Pennsylvania

                   Lawrence J. Brady, Staff Director
                John D. Cuaderes, Deputy Staff Director
                     Robert Borden, General Counsel
                       Linda A. Good, Chief Clerk
                 David Rapallo, Minority Staff Director

Subcommittee on Federal Workforce, U.S. Postal Service and Labor Policy

                   DENNIS A. ROSS, Florida, Chairman
JUSTIN AMASH, Michigan, Vice         STEPHEN F. LYNCH, Massachusetts, 
    Chairman                             Ranking Minority Member
JIM JORDAN, Ohio                     ELEANOR HOLMES NORTON, District of 
JASON CHAFFETZ, Utah                     Columbia
CONNIE MACK, Florida                 GERALD E. CONNOLLY, Virginia
TIM WALBERG, Michigan                DANNY K. DAVIS, Illinois
TREY GOWDY, South Carolina













                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on May 12, 2011.....................................     1
Statement of:
    Riebe, Dave, president of logistics and distribution, Quad/
      Graphics; Jerry Cerasale, senior vice president, government 
      affairs, Direct Marketing Association; Rob Melton, vice 
      president of specialty paper, Domtar; and Todd Haycock, 
      director, postal services, 3i Infotech, North America......     4
        Cerasale, Jerry..........................................    15
        Haycock, Todd............................................    31
        Melton, Rob..............................................    24
        Riebe, Dave..............................................     4
Letters, statements, etc., submitted for the record by:
    Amash, Hon. Justin, a Representative in Congress from the 
      State of Michigan, prepared statement of...................    50
    Cerasale, Jerry, senior vice president, government affairs, 
      Direct Marketing Association, prepared statement of........    17
    Connolly, Hon. Gerald E., a Representative in Congress from 
      the State of Virginia, prepared statement of...............    51
    Haycock, Todd, director, postal services, 3i Infotech, North 
      America, prepared statement of.............................    33
    Melton, Rob, vice president of specialty paper, Domtar, 
      prepared statement of......................................    26
    Riebe, Dave, president of logistics and distribution, Quad/
      Graphics, prepared statement of............................     6

 
  WHERE HAVE ALL THE LETTERS GONE? THE MAILING INDUSTRY AND ITS FUTURE

                              ----------                              


                         THURSDAY, MAY 12, 2011

                  House of Representatives,
    Subcommittee on Federal Workforce, U.S. Postal 
                          Service and Labor Policy,
              Committee on Oversight and Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 9:36 a.m., in 
room 2247, Rayburn House Office Building, Hon. Dennis Ross 
(chairman of the subcommittee) presiding.
    Present: Representatives Ross, Amash, Jordan, Walberg, 
Lynch, and Connolly.
    Staff present: Gwen D'Luzansky, assistant clerk; Justin 
LoFranco, press assistant; Jeffrey Post, professional staff 
member; Peter Warren, policy director; Kenneth John, detailee; 
Kevin Corbin, minority staff assistant; and Mark Stephenson, 
minority senior policy advisor/legislative director.
    Mr. Ross. Good morning and welcome. I would like to call 
the Subcommittee on the Federal Workforce, U.S. Postal Service 
and Labor Policy to order.
    Today our hearing is entitled Where Have All the Letters 
Gone? The Mailing Industry and Its Future.
    I will begin by reading our mission statement, as we do in 
the full committee and subcommittees of the Oversight 
Committee.
    We exist to secure two fundamental principles: first, 
Americans have a right to know that the money Washington takes 
from them is well spent and, second, Americans deserve an 
efficient, effective government that works for them. Our duty 
on the Oversight and Government Reform Committee is to protect 
these rights.
    Our solemn responsibility is to hold government accountable 
to taxpayers, because taxpayers have a right to know what they 
get from their government. We will work tirelessly in 
partnership with citizen watchdogs to deliver the facts to the 
American people and bring genuine reform to the Federal 
bureaucracy. This is the mission of the Oversight and 
Government Reform Committee.
    I will now start with my opening statement and then 
recognize the ranking member for his.
    The demand for profitable first class mail continues to 
decline due to deep economic recession and the ever-increasing 
reach of the Internet and new digital media. Today's hearing 
presents an opportunity for lawmakers to hear important 
testimony from the mailing industry which has been left reeling 
in recent years by these developments. It is an industry whose 
very survival depends on a strong and profitable U.S. Postal 
Service.
    The economic scope of the mailing industry and its impact 
on the U.S. economy cannot be overstated. According to industry 
sources, the mailing industry represents over 6 percent of the 
Nation's jobs and over 7 percent of the Nation's GDP. The 
industry touches virtually every private and public sector of 
the economy, accounting for approximately 8.7 million jobs and 
generating $1.1 trillion in economic activity in 2009, 
according to a 2010 jobs report sponsored by the Envelope 
Manufacturers Association Foundation.
    Unfortunately, these numbers are down from recent years. As 
the recession and electronic diversion have eaten away at the 
mail volume, the printing, publishing, and paper industries 
were especially hit hard, each losing 10 percent or more of 
their employees from 2008 to 2009. Japs-Olson, a direct mail 
printing company, had to lay off nearly 300 employees between 
2006 and 2010, 30 percent of its work force. The U.S. Postal 
work force declined only 15 percent during the same period, 
even as mail volume fell by 20 percent.
    Even as the use of Internet and new media increases, direct 
mail remains an effective tool for communicating with consumers 
at all levels. Combining direct mail with the Internet has 
proven to be more effective than using either in isolation. As 
a result, businesses across America, large and small, are 
increasingly working mail-based advertising into their 
marketing campaigns. When mailers pay postage, that postage 
should be used to manage the Postal Service.
    Unfortunately, the Postal Service has been unable to adapt 
itself quickly to a world where electronic communication is 
rapidly replacing physical mail. This failure of adaptation has 
left the Postal Service with severe excess capacity and 
burdensome labor costs, and put it on a trajectory that will 
lead to fiscal insolvency by October 2011.
    The looming fiscal crisis of the Postal Service can no 
longer be ignored. Congress must work with businesses, unions 
and Postal Service itself to reform the Postal Service's 
business model and achieve long-term sustainability. In short, 
together we must all work together and right-size the postal 
system for the 21st century.
    However, before we can discuss the details of reform, I 
believe it is important to make sure that we understand the 
challenges that the mailing industry has faced and continues to 
face today. That is why we are here today.
    With that in mind, I thank the witnesses for appearing and 
I look forward to their testimony.
    I now recognize the distinguished Member from 
Massachusetts, the ranking member, Mr. Lynch, for his opening 
statement.
    Mr. Lynch. Thank you, Mr. Chairman. I appreciate the 
courtesy.
    I also want to thank our witnesses for their testimony.
    Today the subcommittee will examine recent developments in 
the mailing industry and, in particular, the economic and 
business challenges faced by large volume mailers, supply 
companies, and mail houses. Given that the Postal Service has 
just released its second quarterly financial report for fiscal 
year 2011, and the news is not good, it is my hope that this 
hearing will also provide us with an opportunity to further 
discuss the immediate steps that we can take in order to 
restore the Postal Service to financial solvency for the 
benefit of the entire postal community and for the country.
    This week, the Postal Service reported that despite 
significant cost reductions and revenue-generating efforts, it 
ended the second quarter of fiscal year 2011 with a net loss of 
$2.2 billion. That compares with a net loss of $1.6 billion 
during the same reporting period last year. So, in addition, 
the Postal Service witness continued decreases in total mail 
volume, which dropped from 42.3 billion pieces to 41 billion 
pieces, a drop in mailing service revenues which declined by 
$568 million, and a loss in total operating revenue which fell 
by $500 million.
    Accordingly, the Postal Service projects that it will have 
reached the statutory debt limit of $15 billion by the end of 
the current fiscal year and, absent legislative change, the 
Postal Service will be forced to default on its mandatory 
payments to the Federal Government, including a $5\1/2\ billion 
retiree health benefit fund payment that is due on September 
30th of this year.
    It is against this extraordinary financial backdrop that we 
must examine recent trends in the mailing industry. After all, 
the Postal Service is an industry cornerstone and its financial 
recovery is vital to addressing many of the challenges faced by 
other postal stakeholders, including mailers, print companies, 
paper businesses, and general corporations across the United 
States. For the sake of the Postal Service's long-term 
financial viability, I understand that we must give due 
attention to various modernization and restructuring proposals 
in order to ensure that the Postal Service is able to 
transition and grow in the digital age.
    When it comes to addressing the Postal Service's current 
financial situation, I believe we have reached the breaking 
point, and we can no longer kick the can down the road. 
Importantly, there are certain actions that we can take in the 
short-term that will point the Postal Service down the right 
financial path. For example, we can revisit the legally 
mandated requirement that the Postal Service prefund 75 years 
of future retiree health benefits with annual payments of $5\1/
2\ billion. Such a requirement is unheard of in the private 
sector and is not faced by any other public enterprise.
    In addition, we can work to reduce the Postal Service's 
pension costs by addressing the significant overpayment of both 
its civil service retirement system and Federal employee 
retirement system liabilities. To this end, I have introduced 
legislation, H.R. 1351, that will rectify the billions of 
dollars in overpayments that the Postal Service has made into 
its civil service retirement system account. Moreover, this 
legislation would allow the Postal Service to use its Federal 
employees retirement system surplus to cover the projected cash 
shortfall that will result when its next retiree health 
benefits payment comes due in the fall.
    Mr. Chairman, I look forward to our witnesses' perspectives 
on these issues, as well as the significant challenges that are 
being faced by the mailing industry generally. I thank you for 
holding today's hearing and I yield back the balance of my 
time.
    Mr. Ross. Thank you, Mr. Lynch.
    Members have 7 days to submit opening statements and 
extraneous material for the record.
    We will now welcome our panel of witnesses. Mr. Dave Riebe 
is president of logistics and distribution for Quad/Graphics; 
Mr. Jerry Cerasale is senior vice president, government 
affairs, for the Direct Marketing Association; Mr. Rob Melton 
is vice president of specialty paper for Domtar; and Mr. Todd 
Haycock is director, postal services, for Infotech, North 
America.
    I welcome you all. Pursuant to our committee rules, all 
witnesses must be sworn in, so if you would please stand and 
raise your right hands.
    [Witnesses sworn.]
    Mr. Ross. Thank you. Let the record reflect that all the 
witnesses answered in the affirmative.
    Thank you and please be seated. What we are going to do is 
ask that you give a brief, less than 5 minute, summary of your 
written testimony that has been presented to the committee, and 
after that we will go into questions. Now I will recognize Mr. 
Riebe for his opening statement.

     STATEMENTS OF DAVE RIEBE, PRESIDENT OF LOGISTICS AND 
   DISTRIBUTION, QUAD/GRAPHICS; JERRY CERASALE, SENIOR VICE 
 PRESIDENT, GOVERNMENT AFFAIRS, DIRECT MARKETING ASSOCIATION; 
ROB MELTON, VICE PRESIDENT OF SPECIALTY PAPER, DOMTAR; AND TODD 
 HAYCOCK, DIRECTOR, POSTAL SERVICES, 3I INFOTECH, NORTH AMERICA

                    STATEMENT OF DAVE RIEBE

    Mr. Riebe. Mr. Chairman and members of the subcommittee, 
thank you for providing me with this opportunity to testify on 
behalf of Quad/Graphics. My name is Dave Riebe and I am 
president of logistics services for Quad/Graphics, the largest 
printer and mail order of magazines and catalogs in the United 
States. We also print and mail many other types of products.
    The majority of Quad/Graphics' 142 facilities are located 
in the United States. On an annual basis, we partner with the 
Postal Service to process 16 billion pieces of mail that 
account for $4 billion in postage.
    Economic activity and advertising spending are key drivers 
of the demand for printing. The global economic recession has 
caused a falloff in printing since 2007. Along with postage 
increases and alternative marketing technologies, many printing 
companies have failed and the industry is undergoing 
consolidation over capacity. My company is not immune to the 
continued impact of the recession. We have had to make job 
reductions, plant closures, and complete other restructuring 
actions.
    Quad/Graphics is encouraged by the cost reduction realized 
by the Postal Service during the last 10 years, but it has not 
been enough to offset the decrease in mail. The Postal Service 
currently maintains a network that was built to support 300 
billion pieces of mail annually. Total mail volume in 2011 will 
be closer to 170 billion. Its network needs to be right-sized 
despite resistance from local communities and their U.S. 
congressional representatives.
    To survive and better serve its customers, the Postal 
Service must be allowed to close and consolidate processing 
facilities and post offices and right-size its payroll. Quad/
Graphics fully supports the Postal Service in that process.
    Congress has an opportunity to help the Postal Service 
resolve its financial shortfall by returning to the Postal 
Service the more than $50 billion that have been overfunded for 
the civil service retirement system. This money belongs to the 
ratepayers since nearly all revenues of the Postal Service come 
from postage, of which 90 percent comes from businesses. 
Additionally, legislative changes are needed to modify or 
eliminate the mandated $5\1/2\ billion annual payment to 
retiree health care.
    We recommend that the retirement system's overpayment 
should be transferred from the pension fund to the retiree 
health benefits fund to fully prefund those obligations. Quad/
Graphics encourages Congress to act in this manner.
    The Postal Service must also grow mail volume and revenue. 
It can do this by offering incentives to mailers. For years we 
have said the Post Office needs to be more businesslike. We 
have asked the Postal Service to be more creative in its 
pricing strategy and to use rightful pricing flexibility.
    In 2011, we are seeing a different approach by the Postal 
Service to incentives that are based on value-added products 
and services, and partnerships with mailers. Quad/Graphics 
fully supports these efforts.
    My company believes that print is a key element in 
effective marketing campaigns that use multiple forms of media. 
More than half of marketers are successfully utilizing three or 
more types of media, including print, in their marketing 
campaigns, according to a 2010 study. Quad/Graphics intends to 
keep print relevant and cost-effective as an important way for 
U.S. companies to conduct business. We are helping our U.S. 
customers reduce their postal costs through investments in our 
innovative distribution network.
    In conclusion, if the Postal Service can manage its costs 
and maintain an acceptable pricing structure, its business can 
be maintained and growth will be realized in certain classes of 
mail. Quad/Graphics will continue to do everything it can to 
help the Postal Service be successful. We encourage Congress to 
do the same.
    Thank you, Mr. Chairman and the subcommittee, for allowing 
me the opportunity to share with you information about Quad/
Graphics and the role we play in the mailing industry. I would 
be happy to answer any questions. Thank you.
    [The prepared statement of Mr. Riebe follows:]




    
    Mr. Ross. Thank you, Mr. Riebe.
    Mr. Cerasale, you are recognized for 5 minutes.

                  STATEMENT OF JERRY CERASALE

    Mr. Cerasale. Thank you very much. Good morning, Chairman 
Ross and members of the subcommittee. I am Jerry Cerasale. I am 
the senior vice president for government affairs for the Direct 
Marketing Association and we appreciate the opportunity to be 
here.
    Director Marketing Association is a trade association for 
marketers and nonprofits to use communication channels to reach 
customers and potential donors directly. Our members represent 
about 70 to 80 percent of all the mail in the U.S. Postal 
Service and about 85 percent of Postal Service revenues.
    As you said, Mr. Chairman, the Envelope Manufacturers 
Association has found that mail has an economic impact of $1.1 
trillion, employing 8.4 million Americans. It is a very 
important channel of communication for our members.
    Marketers have always had to adapt to technology changes to 
survive, and so must the Postal Service, and the Postal Service 
has done so in the past; you go from horse drawn carriages to 
Pony Express to the rail to the auto to the air, and hopefully 
now to electronic.
    The technology really affects direct marketers and our 
members in four distinct ways: internally what happens at the 
Postal Service, internally in their own operations, customer 
preferences, and disposal of the mail as an important factor 
with technology. The Postal Service has automation and it has 
improved productivity.
    Some of the productivity gains, some of the help has been 
lost, however, with requirements that are placed on mailers for 
preparation and IT requirements. The increased costs are 
exactly like a postage increase, so some of that has been lost, 
and we really hope that internally the Postal Service can do 
more with electronic means to accept the mail and take postage, 
to try and reduce paperwork there and make some savings.
    For mailers, the new electronic communications really open 
up a new avenue to reach customers and donors, but it is also 
an avenue that we can use to complement the mail. New print 
technologies allow multiple pieces of mail in one print run, so 
we can take advantage of presort and also different demographic 
considerations for the recipients.
    We can complement electronic shopping. Something goes in a 
shopping cart, it is removed from a shopping cart. You can 
print a postcard or a catalog with that item that was removed 
from the shopping cart and send it to them and increase sales 
with a new offer.
    Members are using electronic messages to say, hey, take a 
look, look out for this catalog, it is coming in the mail 
tomorrow, and that is an important thing. Mail is used to drive 
traffic to Web sites. Our catalog members don't have to be told 
when the catalog reaches the home, they just take a look at 
traffic on their Web site; it is a driver to Web sites.
    There are companies out there that will find out what my 
preference is for receiving communications, and a marketer can 
go to them and they will send to me an electronic message, to 
Dave a mail message, so it can all be done at once. These kinds 
of complementary activities of electronic and print are there, 
and we hope it is being used. And it all depends on the return 
on investment, the return on investment for the advertising 
dollar. Wherever it is greater, that is where the marketers are 
going to go.
    On the environmental side, it is interesting. You want to 
improve the value of the mail and the idea of the thoughts of 
the importance of mail to consumers, and by technological 
improvements in paper and so forth you reduce the environmental 
imprint. But you also have increased recycling, and we are 
working to try and get more and more mail recycled. The EPA 
said 64 percent of standard mail was recycled in 2009. We want 
that to increase so it increases the value of the mail in the 
minds of the American consumers.
    There is a consumer preference. Clearly, they like bill 
pays and that saves marketers money. That first class mail is 
going to go. They are incentives. They are happy to receive the 
bill electronically. That saves marketers money and it meets 
consumer preferences. That mail is going to be gone. But banks 
have found electronic customers, they retain them more if they 
send them a piece of mail.
    I know my time is just about up. And we need postal 
delivery.
    We do applaud the Postal Service for looking for a summer 
sale for mail pieces that have a QR code to try and complement 
mobile communications with print. It all comes down to the 
return on investment, postage. You have to figure out the 
retirement and the health issue and the Postal Service has to 
downsize, however. We have to have that straight.
    Thank you very much for your time.
    [The prepared statement of Mr. Cerasale follows:]



    
    Mr. Ross. Thank you, Mr. Cerasale.
    Mr. Melton, you are recognized for 5 minutes. Thank you.

                    STATEMENT OF ROB MELTON

    Mr. Melton. Chairman Ross, Ranking Member Lynch, and 
members of the subcommittee, my name is Rob Melton and I am the 
vice president of converting papers for Domtar. Domtar is the 
No. 1 producer of printing and writing papers in North America, 
and we employ 8,500 people across the United States and Canada. 
I very much appreciate the opportunity to appear before you 
this morning to provide a paper manufacturer's perspective on 
the Postal Service and the mail supply chain.
    As Chairman Ross and others have mentioned this morning, 
the Postal Service is the engine that drives the $1.1 trillion 
mailing industry and provides 8.3 million jobs. As you know, 
the Postal Service is on the brink of insolvency. Through our 
active membership with EMA and customer relationships, we 
clearly understand the devastating impact on the mail industry 
if the Postal Service issues are not resolved.
    Regulatory and legislative decisions that result in changes 
to the reliability, level of service, and cost to deliver mail 
all influence how our customers choose paper as their 
communication medium over other technology options. With 
approximately 30 percent of printing papers produced by our 
industry traveling through the mail stream, these choices have 
a dramatic impact on our bottom line. Uncertainty about the 
viability of the Postal Service will negatively impact mailer 
and marketer decisions to choose mail, so the urgency to 
restore confidence that the Postal Service is a dependable 
partner is great.
    Our industry has been forced to respond to economic 
challenges. The paper industry has faced very similar 
challenges to the Postal Service. Structural decline in paper 
consumption since 2004 has averaged 4 percent per year. Part of 
this is due to the cyclical nature of our business and the 
economy, but primarily due to the changes in the way people 
communicate and conduct business. This has left us with excess 
capacity and a cost structure that cannot be supported by 
current or expected demand.
    We have focused on cost, including making difficult 
decisions to close higher cost machines and facilities, in 
order to be more efficient and to maintain critical balance 
between supply and demand. Since 2007, Domtar has closed 
machines in Maine, Ontario, Wisconsin, and North Carolina. In 
fact, a few weeks ago we announced yet another pending closure 
of a machine in Arkansas. This is one of four machines that 
exist in the facilities and will have a negative impact on 110 
people.
    These are real jobs in rural America with wages and 
benefits in the six figures, jobs that are not easily replaced. 
To put in context, U.S. paper and paperboard has declined 10 
percent over the past 3 years. Fifty-two paper mills have been 
closed; the paper industry work force has been reduced by 31 
percent, losing nearly 400,000 jobs.
    However, we have not just focused on cutting costs; we have 
focused on meeting the evolving needs of our customers to try 
to mitigate the trend of structural demand decline. Examples of 
this include developing products for new print technologies 
that will allow marketers to digitally print images to be more 
customized and variable to drive response rates and improve 
their returns. We also are reducing overall paper consumption 
by making lighter weight papers that have similar attributes to 
current products that allow mailing costs to go down, but yet 
deliver the same results.
    One fact that I think needs to be known is that we are 
fighting back. We are making sure that consumers and perception 
of the paper-based communications are well known. Sixty-three 
percent of all paper produced in our industry is recovered. 
That includes paper that is produced that goes into archival 
applications, such as books or archives, but also toilet and 
towel and tissue, so they are not recoverable.
    We have also introduced a paper campaign, Domtar has, that 
heavily raises awareness of the intrinsic value and sustainable 
nature of paper through our Paper Because campaign. We have a 
Web site, PaperBecause.com, which has a great deal of 
information about this, and I encourage you to check it out.
    One example of where Paper Because campaign is focusing is 
on raising awareness of consumers of some misguided attempts to 
convert paper-based mail recipients to electronic transactions, 
often without choice. Recent polling data by Wilson Research 
found that 66 percent of Americans preferred receiving paper 
bills and statements, while only 13 percent preferred 
electronic delivery.
    Yet institutions are increasingly switching customers to 
electronic statements without choice and in many cases are 
charging for paper statements to manage their accounts. For 
example, the Social Security Administration is no longer 
mailing annual statements. While we appreciate the cost 
savings, this is not without risk. We don't dispute that some 
customers prefer electronic statements, but consumers should 
have a choice and shouldn't be penalized for preferring paper-
based statements.
    The short-term decisions that are acted upon to save the 
Postal Service and control costs and deal with statutory fraud, 
pension, and health care obligation funding rules will 
underestimate the impact on mail volume and may accelerate 
volume decline further.
    The paper industry has been forced to make difficult 
decisions. We have the ability to adapt, to change our cost 
structure, to anticipate customer needs, and set about a task 
to resolve them. The Postal Service should do the same. Failure 
is not an option, as we have many industries and so many jobs 
depend upon the well functioning reliable Postal Service.
    Thank you for your time. I am happy to answer any 
questions.
    [The prepared statement of Mr. Melton follows:]



    
    Mr. Ross. Thank you, Mr. Melton.
    Mr. Haycock, you are recognized for 5 minutes.

                   STATEMENT OF TODD HAYCOCK

    Mr. Haycock. Good morning, Mr. Chairman and members of the 
committee. My name is Todd Haycock, and I am the director of 
postal services for 3i Infotech North America. Thank you for 
the opportunity to speak to you today about the changes that I 
have seen over the past few years in this industry and what I 
expect to see in the future.
    As the Nation's largest outsource remittance processing 
provider and one of the largest first class mailers in the 
industry, mailing approximately half a billion mail pieces 
annually, the U.S. Postal Service is one of our largest 
partners.
    It wasn't that long ago that the U.S. Postal Service was 
the only choice for sending and receiving bills, invoices, 
statements, and other transactional documents. However, this 
shift away from physical mail delivery to other forms of bill 
presentment and payment has increased pace in recent years as 
the number of alternative consumer billing and payment options 
has grown. You may be familiar with online bill presentment and 
payment, but other channels are emerging, such as secure email 
billing and payment, electronic mailboxes tied to physical 
street addresses, mobile presentment and payment, text-based 
billing and payment, and more.
    The shift to alternative channels is coming at the 
detriment of the U.S. Postal Service-handled remittance mail, 
and the decline in postal remittance mail has caused 3i 
Infotech to close processing facilities in Tampa, Florida, 
Baltimore, Maryland, and Des Moines, Iowa. At the same time, 
other remittance processors have decided to exit the business 
entirely, to focus on their core financial services. We have 
acquired and consolidated both JP Morgan Chase's and First 
Tennessee Bank's remittance processing operations. I anticipate 
that other consolidations will continue to occur in the 
industry as providers find they can't maintain the scale or 
efficiencies necessary to remain profitable.
    When paired with trend directions and analyst predictions, 
this continuing shift indicates that postal mail is changing 
from being the dominant channel for bill and payment delivery 
to being one of many channels available. Print bills and paper 
remittance exist alongside all the other electronic channels, 
with all measuring relatively equal levels of importance to the 
biller.
    At 3i Infotech, we follow these trends very closely and, 
therefore, focus on providing new and expanded products and 
services to serve the changing billing and payment market. 
There are two sides to the equation: the bill and the payment. 
I see this change in how payments are being made as being 
driven by the consumer. The ease of making payments on a 
computer or on a mobile device, where a few clicks can complete 
the transaction, is a very appealing option to time-pressed 
consumers.
    On the other hand, the presentment of these documents has 
not been subject to as vast of a shift away from the Postal 
Service to electronic bill delivery. I believe this is mainly 
because the shift is not being driven by the consumer, but by 
businesses. I personally prefer to receive a paper statement 
and then go online to make my payment, as do many individuals 
that I know.
    For businesses, however, there is good reason for trying to 
drive consumers to electronic presentment. The biggest concern 
is the cost. With postage rates increasing and the demand on 
large mailers to make expensive changes to the mailing process 
in order to meet changing postal requirements, businesses have 
to make hard choices as to where to assign their resources and 
capital. I am seeing more of my business customers pushing hard 
to drive consumers away from paper. As an example, one of my 
customers is currently planning on charging consumers $1.50 per 
month if they wish to continue to receive paper statements. And 
they are in the process of informing customers of this pending 
change.
    But this organization is not alone in pushing for 
electronic adoption. As an example, between 2008 and 2009, one 
of our customers saw a 5\1/2\ percent increase in the number of 
monthly statements being presented electronically. In 2010, it 
grew to an 8.3 percent increase. This means that electronic 
presentment represents 11.3 percent of their total volume, and 
will probably grow even more in 2011.
    On the other hand, one of my other customers introduced 
electronic presentment and payment in July 2008 and now, in 
March 2011, they have 147,328 consumers receiving electronic 
statements every month. That represents 16 percent of their 
total volume.
    Every study and analyst group predicts that the volume of 
paper bills mailed through the U.S. Postal Service will 
continue to decline in coming years in favor of electronic 
alternatives. But the rate at which that decline occurs is 
dependent on what actions the U.S. Postal Service takes over 
the next couple of years. The ball is already rolling, and 
reversing the current trend will be difficult. However, I think 
if the U.S. Postal Service focused on what the mailers in the 
industry need, the value the mail can provide, and decreasing 
the complexity and cost of the mailing process, businesses will 
divert their capital and resources to more oppressing projects 
instead of trying to move away from physical mail in an effort 
to cut costs.
    The U.S. Postal Service faces substantial changes, both 
financially and structurally, that need to be addressed 
directly. However, I have observed that the new U.S. Postal 
Service management team is willing to address these issues and 
increase their focus on mailers. This is very encouraging and I 
feel will be key in keeping the U.S. Postal Service as an 
indispensable medium of commerce and communications.
    Thank you, and I look forward to your questions.
    [The prepared statement of Mr. Haycock follows:]



    Mr. Ross. Thank you, Mr. Haycock.
    We will now move into the series of questions and I will 
recognize myself for 5 minutes.
    It is interesting because we talk about the Postal Service, 
and I equate it to the original information highway that over 
the last 200 years has provided, by way of infrastructure, the 
flow of information to households and to businesses everywhere, 
and yet, over the last 20 years, predominantly with the use of 
the Internet, we have seen times change. But I don't think we 
have seen the Postal Service adapt to the market trends that 
have happened as a result of additional information highways 
that have been developed out there.
    My first question would go to those that are in the 
manufacturing arena, or not manufacturing, but in the mailing 
arena.
    Mr. Riebe, what percent, can you say, of your total cost is 
labor cost for your business?
    Mr. Riebe. I actually don't know that right off the top of 
my head.
    Mr. Ross. OK.
    Mr. Cerasale, any of your members, do you have any idea, in 
your association, what percent labor cost is of the total cost?
    Mr. Cerasale. I don't. I know that some other delivery 
companies, the labor cost is about 50 percent of their total 
cost.
    Mr. Ross. OK.
    And, Mr. Melton, can you say?
    Mr. Melton. About one-third.
    Mr. Ross. About one-third, so about 33 percent is labor 
cost?
    Mr. Melton. Yes.
    Mr. Ross. Mr. Haycock.
    Mr. Haycock. I am not exactly sure, but I know it is less 
than 50 percent.
    Mr. Ross. OK. And what we have seen, the testimony here 
today, we have seen the U.S. Postal Service post a $2.2 billion 
loss for the last quarter, $2.6 billion for the year-to-date. 
Eighty percent of their cost is labor cost. It almost makes it 
cost-prohibitive to do business unless some significant 
systemic changes are made. Your businesses have had to make 
those changes.
    Could you describe, Mr. Riebe, some of the changes that you 
have had to make? Did it include layoffs? Did it include 
product reformation and marketing changes or things of that 
nature?
    Mr. Riebe. Yes, thank you. Absolutely. When we hit the 
recession, we are actually in an industry that just had too 
much capacity, which is similar to other industries, and we 
have put a big focus on looking at automation, which actually 
reduces labor cost, and focusing on taking out equipment that 
is not efficient, and we have seen a reduction in the overall 
capacity that we have. Whereas, in some plants, we were running 
at 50 percent capacity, today, through consolidation, we were 
able to raise up the plants that weren't shut down to a 
capacity rate of 85 to 90 percent, which is much more 
economically efficient.
    Mr. Ross. Thank you.
    Mr. Melton, I know you mentioned, I think, that you have 
had to undergo some changes, furloughs.
    Mr. Melton. Yes. In the last few years, we have laid off a 
significant amount of people as a result of having excess 
capacity and machine and facility closures, probably in the 
neighborhood of 3,000 people, 2,000 to 3,000 people.
    Mr. Ross. Mr. Haycock.
    Mr. Haycock. On our manufacturing side where we produce the 
invoices and statements, we have continued to increase our 
productivity and, thus, having to lay off employees as we 
increase the productivity using automation and equipment to do 
that. On the remittance side, we have also closed facilities 
and consolidated because that volume has dropped dramatically.
    Mr. Ross. Mr. Cerasale, go ahead.
    Mr. Cerasale. We have seen studies show that during the 
recession we had a reduction within the mailing industry of 
about 25 percent for employees.
    Mr. Ross. And what you have done, I guess, is to adapt to a 
market change in order to stay solvent, and my question to each 
one of you, with my last minute here, is do you think that the 
Postal Service is doing enough to reduce their cost to avoid 
insolvency?
    Mr. Riebe.
    Mr. Riebe. I don't, but I think they are being restricted 
by some outside influences as well.
    Mr. Ross. And what would those be?
    Mr. Riebe. Well, I think the ability to be able to right-
size their facilities. There are definitely facilities out 
there that are not supporting themselves and don't make good 
business sense, but there is lobbying to keep them open anyway.
    Mr. Ross. I understand.
    Mr. Cerasale.
    Mr. Cerasale. We can't afford the excess capacity; they 
should be moving much more rapidly and reducing the excess 
capacity of the Postal Service.
    Mr. Ross. Mr. Melton.
    Mr. Melton. Agreed. It is not going to get any better, and 
you need to make tough decisions now to viable for the future.
    Mr. Ross. And that includes consolidation?
    Mr. Melton. Yes.
    Mr. Ross. OK.
    Mr. Haycock.
    Mr. Haycock. It is interesting to me that years ago the 
cost of manufacturing the statements to present for our 
customers and the cost of postage were very similar, and now 
the differential there is much bigger. We have reduced the cost 
for manufacturing, but the postal costs have just continued to 
go up, which brings attention to those costs that businesses 
want to then stop mailing.
    Mr. Ross. Thank you.
    I see my time is up. I now recognize the ranking member 
from Massachusetts, Mr. Lynch, for questions for 5 minutes.
    Mr. Lynch. Thank you, Mr. Chairman.
    Mr. Riebe, I agree with a lot of your testimony; we will 
get to that part. I am just concerned, are you aware of the 
labor contract recently ratified by the American Postal Workers 
Union?
    Mr. Riebe. I am aware of it.
    Mr. Lynch. OK. The agreement, as you know, will reduce 
Postal Service labor costs by instituting a 2-year pay freeze 
and introduces a new career pay schedule that is below the 
existing schedule and substantially increases the use of non-
career employees. Overall, this will result in over $3 billion 
in savings over the term of the agreement, and the Postal 
Service is looking forward to executing similar agreements with 
the other postal unions going forward.
    Would you agree that is a significant cost saving that will 
result from this contract?
    Mr. Riebe. I would say it is a step in the right direction. 
Whether or not significant is the word I would use based on 
their overall labor costs, I don't know if I could get there.
    Mr. Lynch. I mean, you do agree that sorting mail, 40 
billion pieces of mail, handling those packages and actually 
physically delivering the mail is a labor-intensive process. I 
don't know how you get away from that. If you are going to 
actually take the mail and deliver it to every home and 
business in America, that is labor-intensive. We don't have 
robots that can do that. So it is a labor-intensive business. I 
just don't see how you get away from that.
    Let's go to something that we agree on. We have been in a 
debate over the overpayment made by the U.S. Postal Service for 
employee service that was outside of the U.S. Postal Service. 
This is for employees who were under the Federal system. And I 
agree with your testimony that the overpayments have been made 
and they have been funded by postal customers.
    I also believe that the U.S. Postal Service employees, the 
postal clerks, the letter carriers, both rural and urban, our 
mail handlers, the supervisors and postmasters, they have 
earned those pension credits. So they have been shortchanged 
because what they are working for is being syphoned over to a 
Federal system. So we actually have a system right now under 
this current formula that the U.S. Postal Service, its 
customers and employees are subsidizing the Federal system.
    Now, we have had a debate about this in committee and with 
the representatives on the Federal Government side, and they 
are saying that you were aware of this, that this was the plan 
all along, and that you all understood that you were going to 
be overcharged to pay for Federal employees who don't work for 
you. That is the response I am getting from the Federal side, 
and I am just curious. Were you told at the beginning that your 
operations were going to subsidize employees who don't work for 
the Postal Service? This is the relationship you have. Were you 
told that, Mr. Riebe?
    Mr. Riebe. Not to the best of my knowledge.
    Mr. Lynch. Mr. Cerasale.
    Mr. Cerasale. No. And I wasn't around, I might look it, but 
I wasn't around in 1972, during that, so I am not sure what was 
told back then.
    Mr. Lynch. I think you were around in 1972.
    Mr. Cerasale. I was around, but not in the postal area, 
yes.
    Mr. Lynch. All right. I was going to say you must have had 
a rough life. [Laughter.]
    Mr. Melton? I am no spring chicken either, sir, so.
    Mr. Melton. I can say I wasn't around in 1972, but I don't 
believe that would be the case.
    Mr. Lynch. All right.
    Mr. Haycock.
    Mr. Haycock. I am in agreement, I don't believe that was 
the case.
    Mr. Lynch. I mean, I don't get this. That is the argument 
that they are making, that the unions here, the mailing houses, 
that the formula is the formula and that you were all part of 
this, that you were going to subsidize the pensions for folks 
that don't work for you or aren't in this business relationship 
in the current configuration.
    And I just scratch my head on how they came up with that. 
They cannot argue that the formula doesn't favor the Federal 
Government and put a greater burden on you, so they are arguing 
that this was the deal. I would just say, if I was sitting in 
your chair, I would be thinking about a lawsuit saying, wait a 
minute, you can't take our revenues and pay the pensions of 
folks that we don't have a relationship with, that aren't 
servicing our businesses. And I don't know if your associations 
have ever thought about that, but I would say now is the time 
to start thinking about it. I really do, because I agree with 
you.
    I also agree on the consolidation of postal services. I am 
running out of time here, but we have asked, and it is not 
outside pressure, I don't believe, that is fighting against 
these closures; I think it is institutional resistance. We have 
38,000 post offices in America today. We have been spending on 
the floor here inordinate amounts of time naming additional 
post offices. I think we are going to run out of names before 
we run out of post offices, to be honest with you.
    But I agree that we have a lot of post offices out there 
that are close together, and we could do a better job of 
consolidating and closing some of those that have several close 
together, clustered, where it would just a matter of walking up 
the street and using the other post office, especially in some 
of our densely populated urban areas. So I am with you on that, 
but I have run out of time.
    Thank you, Mr. Chairman. I yield back.
    Mr. Ross. Thank you, Mr. Lynch.
    I now recognize the Vice Chair of the subcommittee from 
Michigan, Mr. Amash.
    Mr. Amash. Thank you, Mr. Chair.
    Mr. Riebe, you mentioned that the total mail volume for the 
Postal Service is 170 billion pieces, and yet the 
infrastructure is built to support 300 billion pieces. Due to 
technology and electronic diversion, and given that mail volume 
has declined steadily for the past 4 years, is it safe to say 
that the Postal Service is wasting money to keep these systems 
operating?
    Mr. Riebe. In some ways they are required to keep some of 
these systems running. Yes, absolutely I would say that.
    Mr. Amash. Would it be sustainable for your company to have 
twice the production capacity that you actually needed and to 
spend money that you don't have on equipment that is hardly 
being used?
    Mr. Riebe. Absolutely not.
    Mr. Amash. And I would ask the same question of the other 
witnesses here.
    Mr. Cerasale. There is excess capacity that should be 
removed, and we would not. We can't afford to maintain that 
excess capacity, and my members wouldn't survive if they 
maintained that excess capacity within their operations.
    Mr. Melton. We are in that exact same position and we have 
closed facilities to match our demand.
    Mr. Haycock. In our manufacturing, similar thing; we try to 
maximize the equipment we have and not have excess capacity, 
just to keep our efficiencies and our costs down.
    Mr. Amash. And I assume each of you would also give the 
recommendations to the Postal Service that we need to reduce 
excess capacity.
    Mr. Riebe. Yes.
    Mr. Cerasale. Yes.
    Mr. Melton. Yes.
    Mr. Haycock. Yes.
    Mr. Amash. Mr. Riebe, you talked about prefunding health 
care with pension fund. Could you talk about that a little 
more?
    Mr. Riebe. Well, I think the belief is it is just to try to 
create an economic environment for the Post Office that makes 
them stronger. We just saw the quarterly results yesterday and 
trying to find a way to use that funding to give them a 
stronger foundation is kind of the theory behind it.
    Mr. Amash. Mr. Riebe, in your company you also print stuff 
that is not mailed, am I right?
    Mr. Riebe. Correct.
    Mr. Amash. And what percentage of your business would that 
be?
    Mr. Riebe. I would say 20 percent.
    Mr. Amash. Has that changed over the past few years?
    Mr. Riebe. Yes.
    Mr. Amash. It has gone up or down?
    Mr. Riebe. Well, it has gone up because we did a major 
acquisition about a year ago, so that brought some product 
lines into our business that weren't mailed directly.
    Mr. Amash. Mr. Cerasale, what is the level of coordination 
between direct marketers and the Postal Service? I guess what I 
am asking is do they have personnel at direct marketing 
facilities? What is generally the scheme?
    Mr. Cerasale. For our larger members, they have a fairly 
significant relationship with the Postal Service, particularly 
at the plant level. Some of our members actually have postal 
operations within the plant attached, mail units there, so 
postal employees are there to accept the mail in the plant. 
Now, some of our smaller members work with customer service 
representatives and work through us, through the association.
    We have a fairly consistent dialog with headquarters, not 
down in the field level here, but with headquarters of the 
Postal Service to try and work with them. So they have a 
relationship with sales forces. Many of them use suppliers like 
printers such as Quad, who print the mail for them, for many 
members, and then enter it in the mail stream, and they have 
relationships with the Postal Service.
    Mr. Amash. Are there any alternatives that direct marketers 
use besides the Postal Service?
    Mr. Cerasale. Oh, absolutely. They are multi-channeled. You 
use electronic, they use telephone, they use direct response TV 
and radio, even broadcast kind of ads. But the Internet and 
eventually moving to mobile. You have to use them all, or else 
you are going to fail.
    Mr. Amash. Mr. Melton, do you have any data to support your 
suggestion that using paper is actually more efficient than 
communicating electronically? I think you had said that people 
prefer paper?
    Mr. Melton. Yes. A study would show, in terms of bill 
presentment, that people prefer a paper-based statement rather 
than an electronic statement.
    Mr. Amash. How much of your paper volume is related to the 
Postal Service?
    Mr. Melton. Approximately 40 percent.
    Mr. Amash. And when you said that 63 percent is 
recoverable, what does that mean exactly, is it that it is 
recyclable?
    Mr. Melton. That means that of the paper that is produced 
in North America, 63 percent of that is recovered and brought 
back in to be produced into products that would be called 
recycled.
    Mr. Amash. So 37 percent would come from trees?
    Mr. Melton. Yes. That would be what we call virgin. But it 
is also renewable.
    Mr. Amash. Well, thank you. My time has expired. Thank you.
    Mr. Ross. Thank you, Mr. Amash.
    We are going to go around again with a few more questions, 
if you all have time.
    Let's talk about the electronic diversion and the Internet 
because for so many businesses out there the Internet has been 
a boost, but for, apparently, the U.S. Postal Service. So what 
I would I would like you to do is to kind of put on a role of 
you are postmaster for a day, and don't concern yourself with 
prefunding or retirement, OK? Let's concern ourselves with 
marketing ideas, innovation, and how we utilize the new avenues 
of information age out there, the Internet, electronic 
diversion, to enhance the Postal Service. I know we have talked 
about consolidation.
    Mr. Cerasale, in some of your comments, your opening 
statement, you talked about how using digital media to physical 
media, I guess is a way to put it. The Postal Service came up 
with, just a couple years ago with a if it fits, it ships 
program. These are innovative ideas. These are entrepreneurial 
ideas. They come better from the marketplace than they do from 
government.
    So what I would ask you to do, if you could, think about 
and explain to me or to this committee what you think could be 
done in conjunction with the electronic media that is out there 
today to enhance the Postal Service. Because even if we do take 
care of the prefunding and the health care thing, we still have 
a systemic issue that we have to deal with with the Postal 
Service, and that systemic issue is how do we adapt them to the 
changes in the marketplace, to the changes in the information 
age so that we don't have to be back here again, as Congress, 
trying to fix something that is antiquated.
    Mr. Riebe.
    Mr. Riebe. Yes. Part of it I brought up earlier. I think 
volume-type discounts, getting creative with pricing, 
incentivizing people to do more than what they are doing. From 
my perspective, the electronic media world is still trying to 
find itself, and for those of us who are on email, or if you go 
on the Web, we still view print as the most unintrusive way, 
print and mail, as the most unintrusive way to solicit somebody 
to buy something for you. But complement it. Let people use the 
Internet as the vehicle to order.
    Now, that does have a negative impact on the Post Office, 
but the belief is that when you are on the computer, and we all 
get them now, you get a lot more emails than you ever used to 
get; you don't know how you are getting them or why you are 
getting them. And it is intrusive to me. Where mail, although 
people try to make it seem intrusive, it is really not; it 
comes in your mailbox and you have an opportunity to make a 
choice at that point. But you don't have to deal with it when 
you are at work, you don't have to deal with it when you are 
trying to relax; you deal with it at your convenience. And I 
still think that is a huge opportunity for the Post Office to 
take advantage of the fact that it is unintrusive.
    Mr. Ross. Thank you.
    Mr. Cerasale. Well, I think, to start, we have to look at 
mobile as well, and I think that this new summer sale they had 
with the QR codes is a great idea for the Postal Service to 
look at. I do think that the Postal Service should partner with 
the private sector with information we have.
    As I said before, if you know that I want to receive things 
electronically and that Dave wants to receive things in paper 
and Mr. Melton wants to receive things over the phone or 
mobile, and you have that information and to work with 
marketers so a marketer can go to one place and its message 
gets sent out to paper to me or paper to him, email to me, on 
the Web, through a mobile phone and have it go out. That is how 
you can complement communications.
    We have to look at this as a whole communications structure 
and trying to reach customers, donors, potential customers, 
potential donors and try and find the preferences that the 
consumers want and get it out. That increases the ROI across 
the board.
    And I think the Postal Service is part of that mix. It is 
going to be a changing part of the mix, and it is clearly going 
to change how the mail is sent in, what is sent in. It may not 
be a catalog, it might be a postcard, it may be a smaller 
catalog, different things. That type of thing, I think, is 
happening today, can happen today, provided Congress doesn't 
really hit privacy legislation that harms this kind of 
information. But that can happen now. That is where I would 
look immediately.
    Mr. Ross. Thank you.
    Mr. Melton.
    Mr. Melton. I think the most unique thing about the U.S. 
Postal Service is it has, by mandate, the ability and 
requirement to reach every household in the United States, and 
that is a very unique infrastructure that I don't think has 
been exploited properly.
    Mr. Ross. I agree.
    Mr. Melton. And some of that is due to statute, the types 
of services and products it can offer as not to compete with 
the private sector, I believe. As an example, you can walk into 
a post office and you can buy packaging and you can buy 
postage, but you can't buy the service to pack that package; 
you need to go to a private store for that. So those are the 
sorts of things I think that I would look to try to change. I 
also think the ability to time delivery of packages with the 
other channels that are there are a unique opportunity, 
particularly with the technology that exists now to very 
targeted make an offer to a consumer.
    Mr. Ross. Thank you.
    Mr. Haycock, briefly?
    Mr. Haycock. I agree with what has been said here. I think 
as the Postal Service focuses on what they core competency is 
and the value of the mail, as has been said, something along 
the lines of rather than paying an extra charge for 2 ounces, 
include that in the overall price, so 1 ounce and 2 ounce is 
the same price so you can add more marketing and reach those 
customers, as has been mentioned.
    Mr. Ross. Thank you. My time is up.
    Mr. Lynch, you are recognized.
    Mr. Lynch. Thank you, Mr. Chairman.
    I agree with the chairman's suggestion that we need 
systemic change, there is no doubt about that. And that is 
notwithstanding the need for a reset on the health care 
payments and a correction for the pension overpayment. But what 
those two items do, though, is buy us time, because the pension 
overpayment is anywhere between $55 and $75 billion, and the 
health benefit contribution here for retirees is $5\1/2\ 
billion per year.
    So if we look at the trend--and I give the Postal Service 
some credit here, and I give the unions a lot of credit as 
well. If you look at what they have done, since 2008 the Postal 
Service has reduced its work force by 120,000 people. Since 
2008 they have cut 120,000 positions.
    And since 2009 it has reduced its total cost by $11 
billion. Some of that is by automation, but $4 billion is 
savings coming from reductions in labor costs. And if you add 
the $3 billion in savings that is going to come out of the 
American Postal Workers Union recent contract going forward for 
the term of that contract, you are talking about $7 billion in 
labor cost savings and you are talking about $14 billion in 
reduction in cost. So they are making significant progress.
    And what I am saying is with the correction to the pension 
overpayment and the fast-track health benefit for retiree 
payments, we could make much more progress if we give ourselves 
more time.
    Now let me turn to a blatantly self-serving question. Each 
of you has briefly mentioned your concern for the financial 
condition of the Postal Service, and you mentioned the retiree 
health benefit payment of $5\1/2\ billion and also the Postal 
Service overfunding, which is anywhere between $50 and $75 
billion. Last month I introduced H.R. 1351, the U.S. Postal 
Service Pension Obligation Recalculation and Restoration Act. 
It just kind of rolls right off your tongue there. [Laughter.]
    The act directs the Office of Personnel Management to 
update the actuarial methodology to be used in allocating the 
CSRS retirement benefits liabilities between the U.S. Postal 
Service and the Federal Government. So we are trying to reset 
that and correct it. Any resulting surplus from this 
recalculation, if it is $55 or $50 or $75 billion, would then 
be transferred over to the Postal Service retiree health 
benefit fund and, further, the act would require that the 
Postal Service $7 billion refund would be refunded immediately 
and applied to the 2011 retiree health benefit payment and 
worker's compensation fund.
    Now, it is sort of what you were talking about to start 
this off, Mr. Riebe. Is that something that you think would get 
this thing going in the right direction, get the Postal Service 
going in the right direction and be helpful to you and your 
businesses?
    Mr. Riebe. Absolutely.
    Mr. Lynch. OK.
    Mr. Cerasale.
    Mr. Cerasale. It would, and we support it.
    Mr. Lynch. Thank you.
    Mr. Melton.
    Mr. Melton. [Remarks made off mic.]
    Mr. Lynch. Thank you.
    Mr. Haycock.
    Mr. Haycock. Yes, it would.
    Mr. Lynch. OK, thank you. I told you it was self-serving. 
[Laughter.]
    I appreciate that.
    Look, in all seriousness, I appreciate you are in business. 
It takes a lot of courage to put yourself out there. You have 
been very helpful with the committee in giving us your 
perspectives. I appreciate greatly that you came here, you took 
the time to come here to testify before Congress to give us the 
perspective that you have and to provide some more impetus for 
change in this system that we all rely upon. So I appreciate 
you coming in and helping the committee with its work. Thank 
you.
    I yield back.
    Mr. Ross. Thank you, Mr. Lynch.
    I now recognize Mr. Amash for further questioning.
    Mr. Amash. Thank you, Mr. Chair.
    Mr. Haycock, can you tell us a little more about your 
company?
    Mr. Haycock. Sure. We are the largest outsource remittance 
processing provider, so all remittance statements, you send 
your coupon in with your check, we process those, as well as 
doing electronic processing of payments; and then we also do 
the bill presentment, so we send out bills in the mail stream, 
invoices, statements. We also provide other channels for our 
customers, electronic channels as well.
    Mr. Amash. You said the Postal Service is one of your 
biggest partners. What other sorts of organizations would be 
big partners?
    Mr. Haycock. Software providers that help us do operations; 
equipment manufacturers that provide us with equipment to do 
our processing.
    Mr. Amash. One of the things I found interesting, you said 
you were encouraged by the new Postal Service management team, 
but expenses this year are up $100 million over the first 6 
months. Can you explain why you are encouraged and what you 
think about that?
    Mr. Haycock. I am encouraged because what I am seeing is 
more customer focus. They are reaching out. They seem to be 
looking at new ideas, not trying to do business as usual, but 
looking at out-of-the-box items. I know there have been some 
discussions within the Postal Service about new options or new 
incentives and other ways of looking at adding value to the 
mail. So even though those haven't been implemented yet, I am 
encouraged that they are looking at those items, looking at the 
mailers.
    Mr. Amash. So is it your belief that the expenses will 
gradually go down as time goes on?
    Mr. Haycock. I don't know if that is the case.
    Mr. Amash. According to USPS data, it appears that for the 
first time less than half of USPS's revenues will come from 
first class mail this fiscal year. Ten years from now--and this 
is a question to all of you--do you think first class mail will 
continue to be the dominant revenue source at the Postal 
Service?
    Mr. Riebe.
    Mr. Riebe. I do not.
    Mr. Cerasale. I agree, it will not be the dominant revenue 
source.
    Mr. Melton. It will not.
    Mr. Haycock. Well, the current trends show that is the 
case. I think if we continue the same path it will definitely 
not. I think there is an opportunity to change that trend by 
accommodating the mailers that do first class mail and using 
that value that the mail has could slow that trend, anyway.
    Mr. Amash. And again this would be a question for all of 
you. Are mailers preparing for a post-first class mail world 
and do you think that the Postal Service's current business 
model will work if first class declines from 78 billion pieces 
in 2010 to 46 billion pieces in 2020?
    Mr. Riebe. I do not.
    Mr. Cerasale. I believe it has to change.
    Mr. Amash. And do you think mailers are prepared for this 
world?
    Mr. Riebe. It depends how it changes.
    Mr. Cerasale. They are prepared in the sense of looking a 
return on investment, and they are going to use alternative 
means if it is not there. Mailers are prepared, marketers are 
prepared to use the mail, and advertising mail is going to be 
dominant. The Postal Service has to downsize to meet that new 
need, its marketers needs, and they will remain a viable 
channel for us. But they are prepared in the sense of they will 
go to alternative means if the return is better elsewhere. It 
is not at the moment, that is why they are in the mail. The 
mail is still a good response vehicle. But that will change if 
the Postal Service doesn't change on its own.
    Mr. Melton. Yes, I think that the standard mail side of it 
will continue to grow and I think the value of that has been 
proven, and the returns are there and I think it is only going 
to improve as technology allows them to be more targeted. I 
also believe that on the statement presentment side that there 
is an opportunity for transpromotional advertising and goes 
along with the bill. You have a relationship with a customer 
already, the opportunity to sell them more is there and 
technology is allowing that.
    Mr. Haycock. In my business, that is what we do, is first 
class mail, and I do see that shift away from first class mail 
happening, and for my business, we offer other alternatives, 
other channels and opportunity for our customers to choose 
which channels they want to use. And we have to kind of go down 
that path in order for us to keep a viable business.
    Mr. Amash. Thank you. I am going to yield back.
    Mr. Ross. Thank you.
    I now recognize the gentleman from Virginia, Mr. Connolly. 
Welcome.
    Mr. Connolly. Thank you, Mr. Chairman.
    I would sort of like to pick up on where our colleague from 
Michigan left off. You know, in and of itself, the decline in 
first class mail doesn't mean anything. There were companies in 
1900 who were making a lot of profit producing buggy whips, but 
if they didn't see the future, they were in trouble, even 
though in 1900 it looked like a profitable business for quite 
some time to come. The fact that we have a shifting market, in 
and of itself, the question is can we create, as you suggest, a 
new business model--by the way, I have some legislation I hope 
you will look at that does just that--that helps take 
cognizance of the changes in the market.
    For example, companies like Amazon.com have become very 
profitable with online sales. They have to, however, get those 
products to market. And the Postal Service, 1 percent now of 
its business is packages like that, but it is 2 percent of its 
profit. So the margin is pretty good.
    Mr. Melton, Mr. Haycock, do you think that there could be a 
future in expanding that kind of niche business for the Postal 
Service at some level of profitability?
    Mr. Melton. Absolutely. And I think there are opportunities 
to perhaps share some routes, as an example. If we are going to 
reach every household in the United States, you might as well 
take advantage of sharing some of those routes.
    Mr. Connolly. If we are serious about making the Postal 
Service successful as we move forward in this century--and I 
know my colleague, Mr. Lynch, has introduced legislation I 
certainly support and supported in the previous Congress in 
this whole prefunding issue, which is very substantial and it 
is an onus on the Postal Service that is unique to the Postal 
Service, Congress does not require it of anyone else, and it is 
costing them billions of dollars every year. So when we look at 
a figure that says you are losing $7 billion a year, but if we 
amortized, for example, the estimated overpayments and 
continuing 100 percent requirement, frankly, we could probably 
substantially change that number in a positive direction.
    But beyond that, that buys us some time, substantial amount 
of time in which to figure out the business model. Mr. Melton, 
you mentioned something about why not let the Postal Service, 
for example, engage in packaging services. Is that correct?
    Mr. Melton. Yes.
    Mr. Connolly. Are there other areas anyone on the panel 
thinks that might be something that come into the Postal 
Service as a niche market for them or something they ought to 
get into? And before you answer, I point out Congress is part 
of the problem. The 2006 legislation, God knoweth why, 
proscribes the Postal Service from entering certain kinds of 
business. Given the situation were are in today, if we really 
mean what we say about caring about its fiscal plight, why 
wouldn't we rescind those restrictions and let 1,000 flowers 
bloom to see what works?
    Mr. Melton.
    Mr. Melton. Yes, I agree it is tough to run a business when 
you have restrictions on controlling your costs and also 
limited in meeting some market demands that may be there. So I 
would encourage that those things are looked at.
    Mr. Connolly. Mr. Haycock.
    Mr. Haycock. The only concern I would have about opening 
everything up would be losing focus on their core, what they do 
best at. Now, I would agree that if there are other areas that 
could use that core business and utilize their infrastructure, 
what they have today, then I would be open definitely for them 
to do that.
    Mr. Connolly. Sure. But can I just engage you on that? I 
have a very large postal office in my district, in Merrifield, 
it is sort of a regional post office. People go there all the 
time for all kinds of things. Why not let them have a Starbucks 
outlet there so that people, when they go there to do their 
other core business, can also get a cup of coffee? You are able 
to do that at the grocery store these days. You are also able 
to do banking at the grocery store, even though neither one of 
those are core missions of the grocery store. But in terms of 
convenience and making it a focal point in terms of retail 
activity, you enhance the viability of the enterprise.
    Wouldn't that be some kind of model we ought to be looking 
at for the Postal Service?
    Mr. Haycock. That seems very reasonable, absolutely.
    Mr. Connolly. Thank you.
    Anyone else on the panel? I have 30 seconds left.
    Mr. Cerasale. I think co-location, as you explained, is 
valuable. They can even try and locate it at another facility 
and have a post office there and open more times. You also have 
the ability to co-locate State and local government things in a 
government facility there as well, so that is an area, looking 
at the 38,000 of them, or it could be less, postal facilities, 
you can try and enhance that real estate footprint.
    Mr. Connolly. Mr. Chairman, my time is up, but the 
gentleman makes a very good point I commend to my colleagues, 
because as someone who ran a local government for a long time, 
historically, a lot of post offices have the stovepipe model; 
we are separate unto ourselves and sovereign, and don't bother 
us. And a new model would suggest this kind of co-location with 
State and local services and government, there could be cost-
sharing, there could be huge efficiencies, and again you are 
making that post office, which already exists, a more focal 
point for the community, which, by the way, my legislation also 
addresses.
    Thank you.
    Mr. Ross. Thank you, Mr. Connolly. I appreciate that input.
    I want to thank the panel members for being here today. We 
are grateful for your input and this subcommittee now stands 
adjourned. Thank you.
    [Whereupon, at 10:45 a.m., the subcommittee was adjourned.]
    [The prepared statements of Hon. Justin Amash and Hon. 
Gerald E. Connolly, and additional information submitted for 
the hearing record follow:]




                                 
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