[Senate Hearing 113-405]
[From the U.S. Government Publishing Office]






                                                        S. Hrg. 113-405
 
                          POSTAL REFORM--2013

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

                                HEARING

                               before the

                              COMMITTEE ON
               HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE

                    ONE HUNDRED THIRTEENTH CONGRESS


                             FIRST SESSION

                               ----------                              

                           SEPTEMBER 19, 2013
           OUTSIDE THE BOX: REFORMING AND RENEWING THE POSTAL
       SERVICE PART I--MAINTAINING SERVICES, REDUCING COSTS, AND
        INCREASING REVENUE THROUGH INNOVATION AND MODERNIZATION

                           SEPTEMBER 26, 2013
  OUTSIDE THE BOX: REFORMING AND RENEWING THE POSTAL SERVICE PART II--
                   PROMOTING A 21ST CENTURY WORKFORCE

                               ----------                              

        Available via the World Wide Web: http://www.fdsys.gov/

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




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                                                        S. Hrg. 113-405

                          POSTAL REFORM--2013

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

                                HEARING

                               before the

                              COMMITTEE ON
               HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE

                    ONE HUNDRED THIRTEENTH CONGRESS


                             FIRST SESSION

                               __________

                           SEPTEMBER 19, 2013
           OUTSIDE THE BOX: REFORMING AND RENEWING THE POSTAL
       SERVICE PART I--MAINTAINING SERVICES, REDUCING COSTS, AND
        INCREASING REVENUE THROUGH INNOVATION AND MODERNIZATION

                           SEPTEMBER 26, 2013
  OUTSIDE THE BOX: REFORMING AND RENEWING THE POSTAL SERVICE PART II--
                   PROMOTING A 21ST CENTURY WORKFORCE

                               __________

        Available via the World Wide Web: http://www.fdsys.gov/

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




[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]





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        COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS


                  THOMAS R. CARPER, Delaware Chairman
CARL LEVIN, Michigan                 TOM COBURN, Oklahoma
MARK L. PRYOR, Arkansas              JOHN McCAIN, Arizona
MARY L. LANDRIEU, Louisiana          RON JOHNSON, Wisconsin
CLAIRE McCASKILL, Missouri           ROB PORTMAN, Ohio
JON TESTER, Montana                  RAND PAUL, Kentucky
MARK BEGICH, Alaska                  MICHAEL B. ENZI, Wyoming
TAMMY BALDWIN, Wisconsin             KELLY AYOTTE, New Hampshire
HEIDI HEITKAMP, North Dakota

                   Richard J. Kessler, Staff Director
               John P. Kilvington, Deputy Staff Director
                    Beth M. Grossman, Chief Counsel
       Lawrence B. Novey, Chief Counsel for Governmental Affairs
                  Katherine C. Sybenga, Senior Counsel
               John G. Collins, Professional Staff Member
               Keith B. Ashdown, Minority Staff Director
         Christopher J. Barkley, Minority Deputy Staff Director
     Catherine A. Bailey, Minority Director of Governmental Affairs
Joseph D. Moeller, Minority U.S. Postal Service Office of the Inspector 
                            General Detailee
                     Laura W. Kilbride, Chief Clerk
                   Lauren M. Corcoran, Hearing Clerk






















                            C O N T E N T S

                                 ------                                
Opening statements:
                                                                   Page
    Senator Carper...............................................1, 391
    Senator Coburn...............................................4, 394
    Senator Tester..............................................17, 417
    Senator Heitkamp............................................20, 406
    Senator McCaskill............................................    22
    Senator McCain...............................................    28
    Senator Pryor................................................    31
    Senator Johnson..............................................   408
    Senator Baldwin..............................................   411
    Senator Ayotte...............................................   414
Prepared statements:
    Senator Carper..............................................53, 449

                               WITNESSES
                      Thursday, September 19, 2013

Hon. Patrick R. Donahoe, Postmaster General and Chief Executive 
  Officer, U.S. Postal Service...................................     6
Hon. Ruth Y. Goldway, Chairman, Postal Regulatory Commission.....     8
Hon. David C. Williams, Inspector General, U.S. Postal Service...    10
Cliff Guffey, President, American Postal Workers Union...........    34
Jeanette P. Dwyer, President, National Rural Letter Carriers' 
  Association....................................................    36
John Beeder, President and Chief Operating Officer, American 
  Greetings......................................................    38
Jerry Cerasale, Senior Vice President, Government Affairs, 
  Director Marketing Association, Inc............................    40
Seth Weisberg, Chief Legal Officer, Stamps.com...................    41

                     Alphabetical List of Witnesses

Beeder, John:
    Testimony....................................................    38
    Prepared statement with attachment...........................   136
Cerasale, Jerry:
    Testimony....................................................    40
    Prepared statement...........................................   201
Donahoe, Hon. Patrick R.:
    Testimony....................................................     6
    Prepared statement...........................................    55
Dwyer, Jeanette P.:
    Testimony....................................................    36
    Prepared statement...........................................   130
Goldway, Hon. Ruth Y.:
    Testimony....................................................     8
    Prepared statement...........................................    71
Guffey, Cliff:
    Testimony....................................................    34
    Prepared statement with attachment...........................    93
Weisberg, Seth:
    Testimony....................................................    41
    Prepared statement...........................................   211
Williams, Hon. David C.:
    Testimony....................................................    10
    Prepared statement...........................................    87

                                APPENDIX

Statement from Donna Harman, President and CEO, American Forest & 
  Paper Association..............................................   218
Additional information submitted by Senator Coburn...............   221
Chart referenced by Senator Coburn...............................   331
Responses to post hearing questions for the Record:
    Mr. Donahoe..................................................   332
    Ms. Goldway..................................................   348
    Mr. Williams.................................................   357
    Mr. Guffey...................................................   362
    Ms. Dwyer....................................................   364
    Mr. Beeder...................................................   366
    Mr. Cerasale.................................................   368

                      Thursday, September 26, 2013

Hon. Patrick R. Donahoe, Postmaster General and Chief Executive 
  Officer, U.S. Postal Service...................................   395
Jonathan Foley, Director, Planning and Policy Analysis, U.S. 
  Office of Personnel Management.................................   397
Frank Todisco, Chief Actuary, Applied Research and Methods, and 
  John E. Dicken, Director, Health Care, U.S. Government 
  Accountability Office..........................................   399
Fredric V. Rolando, President, National Association of Letter 
  Carriers AFL-CIO...............................................   426
John F. Hegarty, National President, National Postal Mail 
  Handlers Union.................................................   428
Robert J. Rapoza, National President, National Association of 
  Postmasters of the United States...............................   430
Douglas J. Holtz-Eakin, Ph.D., President, American Action Forum..   432
Dean Baker, Ph.D., Co-Director, Center for Economic and Policy 
  Research.......................................................   434

                     Alphabetical List of Witnesses

Baker, Dean, Ph.D.:
    Testimony....................................................   434
    Prepared statement...........................................   540
Donahoe, Hon. Patrick R.:
    Testimony....................................................   395
    Prepared statement with attachment...........................   451
Foley, Jonathan:
    Testimony....................................................   397
    Prepared statement...........................................   471
Hegarty, John F.:
    Testimony....................................................   428
    Prepared statement...........................................   512
Holtz-Eakin, Douglas J., Ph.D.:
    Testimony....................................................   432
    Prepared statement...........................................   535
Rapoza, Robert J.:
    Testimony....................................................   430
    Prepared statement...........................................   520
Rolando, Fredric V.:
    Testimony....................................................   426
    Prepared statement...........................................   489
Todisco, Frank:
    Testimony....................................................   399
    Prepared statement...........................................   475

                                APPENDIX

American Enterprise Institute for Public Policy Research, 
  statement for the Record.......................................   544
Postal Workforce Pay and Benefits Statistics submitted by Senator 
  Coburn.........................................................   551
Federal Law Enforcement Officers Association, statement for the 
  Record.........................................................   553
National Active and Retired Federal Employees Association, 
  statement for the Record.......................................   559
National Treasury Employees Union, statement for the Record......   565
National Association Letter Carriers, statement for the Record...   572
Responses to post-hearing questions for the Record from:
    Mr. Donahoe..................................................   580
    Mr. Foley....................................................   586
    Mr. Todisco and Mr. Dicken...................................   590
    Mr. Holtz-Eakin..............................................   597


                     OUTSIDE THE BOX: REFORMING AND
                      RENEWING THE POSTAL SERVICE,
                 PART I--MAINTAINING SERVICES, REDUCING
   COSTS AND INCREASING REVENUE THROUGH INNOVATION AND MODERNIZATION

                              ----------                              


                      THURSDAY, SEPTEMBER 19, 2013

                                     U.S. Senate,  
                           Committee on Homeland Security  
                                  and Governmental Affairs,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10:01 a.m., in 
room SD-342, Dirksen Senate Office Building, Hon. Thomas R. 
Carper, Chairman of the Committee, presiding.
    Present: Senators Carper, Pryor, McCaskill, Tester, 
Heitkamp, Coburn, McCain, and Johnson.

              OPENING STATEMENT OF CHAIRMAN CARPER

    Chairman Carper. The Committee will come to order. 
Actually, there is a lot of order here already and, I hope, 
some optimism. It is a beautiful day out there and I hope that 
the future turns out to be just as bright as this day has been 
so far.
    Thank you for joining us, Dr. Coburn and I, and some of our 
colleagues will be coming along shortly. I want to thank our 
staffs for the work you have done in helping us prepare for 
this hearing, and for all of you for the work that you have 
done in preparing for this day.
    We meet today to examine the financial challenges facing 
the United States Postal Service (USPS) and to consider 
proposals that have been put forward to address those 
challenges. Since I first joined this Committee, actually 12 
years ago as a freshman Senator, one of my top goals has been 
to not just help the Postal Service get by, but to help it be 
strong once again and remain viable for the long-term. I think 
that is a goal we share.
    Back in 2006, I worked with Senator Collins, Senator 
Lieberman, our House colleagues and the Bush Administration, a 
lot of key stakeholders, to give the Postal Service some of the 
tools that it would need to deal with the challenges posed by 
the increasing use of electronic forms of communication.
    We had no idea at the time that the worst recession since 
the Great Depression lay just around the corner, and that it, 
along with the growing use of email, electronic bill pay, and 
other communication innovations would so dramatically erode 
mail volume.
    Today, as I have mentioned before at this Committee's 
hearings and in other venues, we find ourselves closer than we 
have ever been to losing the vital services that the Postal 
Service offers, along with the eight million or so jobs that 
depend on its continued vitality. As we sit here today in the 
fall of 2013, the Postal Service has maxed out its credit line 
with the U.S. Treasury and is rapidly running out of cash.
    Despite an improving economy and some positive signals, 
particularly from package delivery and advertising mail, the 
immediate future for the Postal Service is not bright. Absent 
legislative intervention, the Postal Service will likely limp 
along for a few months unable to invest for the future, and 
with its employees and customers uncertain of what the future 
holds. It can only limp along this way for so long.
    This situation is unacceptable. It is also avoidable and it 
calls for urgent action from Congress and the Administration. 
Unfortunately, despite repeated requests from Postal management 
for assistance, we failed to act. After months of effort, 
though, to find common ground, Dr. Coburn and I finally 
succeeded in introducing bipartisan, comprehensive legislation 
on August 1 that has the potential, to set the Postal Service 
on the path toward self-sufficiency and relevance in the 21st 
Century.
    And I want to just say here publicly how grateful I am to 
him and to the folks on his staff for working with John 
Kilvington and others on our staff and those that are 
represented in this room and outside this room. A lot of work, 
hard work, a lot of give and take. But I think in the end it is 
going to be worth all that effort.
    Our bill attempts to permanently address the Postal 
Service's longstanding health and pension issues and right-size 
its processing and delivery network while providing it with the 
tools to generate new revenue in a digital world. Some of you 
have heard me say this before. I will just say it again.
    The Postal Service is unique in this country. Nobody else 
goes to every mailbox, virtually every door, business and 
residential, in this country 5 or 6 days a week. There is a 
great potential to earn additional revenues from this network. 
We have to figure out collectively how to access that and how 
to realize that potential.
    But my goal with this bill, and I believe Dr. Coburn's goal 
as well, is to enact a set of reforms that are fair to really 
three groups of people. One, our Postal customers; two, our 
Postal employees and retirees; and to taxpayers. Our further 
goal is to fix this problem, at least for the foreseeable 
future, and not to kick the can down the road.
    Our hearing today will focus largely on the provisions in 
our bill that relate to Postal rates, potential changes in the 
levels of service provided by the Postal Service, and the 
innovations that Postal management must put in place in order 
for the Postal Service to survive and thrive in the coming 
years.
    It is important to note at this point that despite the 
relatively positive financial news we have seen in recent 
months, some tough decisions are still needed in order to get 
the Postal Service out of the troubles that it faces, and 
whether it happens today, next month, or next year, it is 
likely that Postal customers will need to sacrifice at least 
some of the conveniences that they enjoy today.
    Our bill would give the Postal Service the authority it 
needs to adjust its operations to reflect the changing demand 
for the products and services it offers, and the changing needs 
of its customers. The Postal Service today needs to be granted 
the authority from Congress to make decisions similar to those 
that our auto companies made in recent years in right-sizing 
their industry, and enable them to succeed despite the 
challenges that they face in the 21st Century marketplace in 
this country.
    But the solution to this problem we have gathered here to 
discuss today cannot be just about cutting. We are not going to 
cut our way out of this dilemma. It has to be about innovation 
and it has to be about finding a way for the Postal Service to 
be almost as important to my son's generation as it was to my 
generation, while we served our country during the Vietnam War, 
and to my parents' generation during World War II.
    The Postal Service has been attempting to do just that. It 
has aggressively marketed its package offerings and made them 
more user-friendly and valuable to customers. It has also 
partnered with companies like the Federal Express (FedEx), like 
the United Parcel Service (UPS), like Amazon.com to deliver 
items the last mile, the last 5 miles, or the last 10 miles to 
their customers.
    For example, in my State, Amazon.com sends trucks out every 
night, actually in the wee hours of the morning, from their 
plant in Middletown about 20 miles from where I live. And they 
send them to Postal Service facilities all over the mid-
Atlantic and northeast to deliver overnight items that people 
have ordered the previous day. Nice piece of business actually.
    The bill that Dr. Coburn and I have put forward would help 
Postal management with its efforts, but also expand the range 
of products and services the Postal Service can offer by 
eliminating what was, in retrospect, a short-sighted 
restriction placed on Postal innovation in 2006. Our provision, 
along with others such as our language allowing the Postal 
Service to compete with UPS and FedEx in the shipping of beer, 
wine, and spirits, is intended to give Postal management the 
tools they need to make greater use of its one-of-a-kind 
processing, distribution, and retail network.
    At the end of the day, what Congress must do is to provide 
some certainty to both Postal employees and customers and to 
ensure that taxpayers, along with all the fiscal challenges we 
face as a country, are not also saddled with shoring up a 
failing Postal Service.
    I do not want to be back here in a few years discussing how 
we can dig ourselves out of yet another Postal crisis. I 
suspect I speak for everyone in this room. I do not believe 
that any of us want to do that, and as it turns out, if we are 
smart enough and if we are creative enough and bold enough we 
will not have to.
    In turning this over to Dr. Coburn for whatever comments he 
wants to make--let me add just a P.S. We face huge fiscal 
challenges in this country. It is better. We had a big deficit 
of $1.4 trillion about 4 years ago, huge deficit, and it is now 
only about $700 billion. It is still a lot. And Dr. Coburn has 
worked a whole lot on these issues, I have, too, and so have 
others of our colleagues.
    I think there are three ways to actually put our country on 
the right track financially. One of those is we need to 
overhaul our entitlement programs in a way that saves money, 
saves these programs, and does not hurt the least of these in 
our society. The second thing we need to do is we need to raise 
some revenues, hopefully by doing more on the tax exclusion 
side, eliminating a lot of tax breaks, some of the ones that 
are least productive, rather than just raising rates.
    And the third thing we need to do, and this really is what 
we are talking about here, we need to, in almost everything we 
do, ask this question: how do we get a better result for less 
money? The Postal Service cannot continue to be a burden on the 
Treasury and the taxpayers. We know you do not want to.
    I was in a meeting yesterday, Tom, and one of the 
discussions was, how can we most help get the economy moving 
even stronger. And some people had different ideas. I think, 
for my money, for our money, the best way to do it is to 
demonstrate, in large part, to the business community who are 
not hiring people, who are sitting on a lot of cash, that we 
can govern, that we can be fiscally responsible, we can provide 
certainty with respect to the Tax Code. There are seven or 
eight million jobs that flow from the Postal Service, and a lot 
of Postal customers need some certainty that the Postal Service 
is going to be in business, is going to be able to provide the 
service that they need and meet their needs.
    So there is a lot riding on this and a lot of it involves 
jobs. Not just the people who work for the Postal Service--we 
value their efforts--but the people who need the Postal Service 
in order to survive and thrive. Dr. Coburn.

              OPENING STATEMENT OF SENATOR COBURN

    Senator Coburn. Well, let me say to you, Senator Carper, we 
worked hard to try to get a draft bill out. I am committed with 
you to try to move this process forward. I would thank your 
staff as well. I think we have a great working relationship. I 
would thank the input that we got from all the outside groups 
as we attempted to do this, and my assessment is that since 
nobody likes it, we are probably right where we need to be. 
Since everybody hates it, that is usually a good middle ground.
    It is a draft. It is a starting point. The reason we are 
having these hearings today is to hear, in formal ways rather 
than in the office, what is positive, what is negative, what 
are the critiques, what are the negatives from everybody's 
viewpoint.
    The fact is, when we finish the Postal bill in Congress, 
everybody is going to have to give something. We are not going 
to solve this problem. I would note that we had Professor 
Geddes from Cornell. Seventy-five percent of the rest of the 
world has privatized their Postal Service. And his other 
recommendation is, you cannot have a shrink to grow model.
    What you have to do is have products and you have to have 
pricing capability and that pricing has to be based on what 
your net revenue can come by hitting the sweet spot for your 
customer and for the Postal Service. This is a draft because we 
intend to make further changes based on input. The reason we 
dropped the bill before the August recess was to make sure that 
both the customers, the Postal Service, and the workers that 
work in the Postal Service know that we are committed to 
getting a deal done.
    And we have demonstrated in our compromises that we are 
willing to do that and we are willing to listen. I am going to 
work with three priorities in mind. First, the Postal Service 
should look to cutting costs. They have to. And I would 
congratulate the Postmaster General on what he has done thus 
far, but he has a way to go.
    The second, we should look for more revenues, not just 
through price increases, but ingenuity, new ideas, new markets, 
in ways that do not unfairly allow the Postal Service to 
compete against the private sector.
    Third and last, we should look to the taxpayers as the last 
resort. As Senator Carper can tell you, I actually believe we 
ought to let the Board of Governors (BOG) have a lot of power 
in running this business so they can react to markets, so they 
can make the kind of changes they need to be competitive.
    I will note that yesterday, FedEx raised its prices--its 
stock went up $5--on the basis that they saw an economy that 
was brightening in terms of their package service. That bodes 
well for the Postmaster and all the employees that work for the 
Postal Service. It also creates some slack and gives them some 
working room. Those are positive developments.
    What the Postal Service and the Postal employees have done 
with packages needs to be applauded, and we need to ensure that 
they have the capability through their management structure to 
be nimble and quick and reflective so they can compete in that 
market.
    The question before the panel today is quite simply, how 
did we do with the draft? And we have heard the blowback. We 
recognize that we want to take that in and then we want to work 
some more. So there is no bill until there is a bill signed by 
the President, but it is going to have to be balanced and 
everybody is going to have to make a sacrifice if we are going 
to solve this problem.
    The Postal Service deserves a great deal of credit for 
staving off the liquidity problems, but that is going to end 
within a year. And so, we have a short period of time to try to 
create an organization that can compete, is long-lasting, and 
represents the service that Americans deserve, and recognizes 
the dedication of the employees that work for the Postal 
Service.
    The Chairman and I are committed to getting this done. That 
is why we are here today. And Tom, again, I thank you and I 
thank all of those that are going to testify for their input.
    Chairman Carper. You bet. We have been joined by a couple 
of our colleagues. I want to thank Senator Johnson, who is 
faithful. I do not know if he is as faithful in going to 
church, but he is faithful in coming to these hearings and I am 
grateful for that. And I also want to welcome Senator Tester. 
We have been spending a fair amount of time talking about 
issues of particular concern to Montana, and I value that 
contribution and look forward to both of your strong 
participation as we go forward.
    I want to just briefly welcome our witnesses. No strangers 
to this panel. They will be glad when they do become strangers 
to this Committee. Our first witness is Patrick Donahoe. People 
say, How does he pronounce his last name? I say, It is like 
who, as in who, as in who are you. So just keep that in mind as 
you say his name. He does not care, though.
    Mr. Donahoe is the Postmaster General and Chief Executive 
Officer (CEO) of the Postal Service. Mr. Donahoe has spent his 
entire career at the Postal Service, beginning as a clerk in 
his hometown of Pittsburgh, and spending many years in top 
leadership positions before being appointed Postmaster General 
in 2010.
    Our next witness is Ruth Goldway, Chairperson--do you like 
to be called Chairwoman? I would if I were a woman. How do you 
like to be referred to?
    Ms. Goldway. Thank you, Senator. We had a long discussion 
about this at the Commission and determined that it should 
remain Chairman.
    Chairman Carper. All right.
    Ms. Goldway. That is the term of art for the position, as 
opposed to the sex.
    Chairman Carper. We will go with that. Chairman of the U.S. 
Postal Regulatory Commission (PRC) it is. Ms. Goldway has 
served on the Commission for 15 years, dating back to her 
appointment to that body by former President Clinton in 1998. 
She has led the Commission as its Chairman since 2009.
    The final witness for the panel, David C. Williams, is 
Inspector General (IG) for the Postal Service. In addition to 
his current position, to which he was appointed in 2003, Mr. 
Williams has served as Inspector General to no less than four 
other Federal agencies, including the Nuclear Regulatory 
Commission (NRC) and the Department of the Treasury.
    We thank all of our witnesses for being here. We would ask 
that you keep your testimony to about 7 minutes. If you go way 
beyond that, I will rein you in. But I know some of you have a 
lot to say and we want to make sure you have a chance to say 
it.
    With that, I will say, Senator Heitkamp, welcome. Great to 
see you. We are looking forward to welcoming you to Delaware 
tomorrow, too. All right?
    Senator Heitkamp. I look forward to it as well, Mr. 
Chairman.
    Chairman Carper. Thank you. There you go. Mr. Donahoe, you 
are our lead-off hitter. Please proceed. Your entire statements 
will be made part of the record.

TESTIMONY OF THE HON. PATRICK R. DONAHOE,\1\ POSTMASTER GENERAL 
        AND CHIEF EXECUTIVE OFFICER, U.S. POSTAL SERVICE

    Mr. Donahoe. All right. Thank you, Mr. Chairman. Good 
morning, Mr. Chairman, Dr. Coburn, Members of the Committee. 
Thank you, Mr. Chairman, for calling this hearing.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Donahoe appears in the Appendix 
on page 55.
---------------------------------------------------------------------------
    The Postal Service is a tremendous organization. It has a 
proud, dedicated workforce that delivers mail and packages to 
every business and residence in America. It does so affordably, 
securely, and reliably. The Postal Service plays an incredibly 
important role in the American economy and in American 
communities. And yet, it is in the midst of a financial 
disaster.
    Over the past 2 years, the Postal Service has recorded 
roughly $20 billion in net losses and defaulted on $11.1 
billion in retiree health benefit payments to the U.S. 
Treasury. We will default on another $5.6 billion payment due 
September 30 of this year, and our cash liquidity remains 
dangerously low.
    The Postal Service, as it exists today, is financially 
unsustainable. It is burdened by an outdated and inflexible 
business model. Without significant structural changes, it will 
continue to record large financial losses. We must get on the 
path to financial stability quickly and we need your help to do 
so.
    Earlier this year, the Postal Service published a 
comprehensive business plan designed to restructure the 
organization and to return it to profitability. If fully 
implemented, our plan will generate $20 billion in savings by 
2017, including repayment of our debt. The Postal Service is 
pursuing elements of this plan very aggressively and we are 
achieving some great results, especially in the area relating 
to consolidation of mail processing facilities, elimination of 
delivery routes, optimizing our retail network, and generating 
new revenue in our package business.
    Unfortunately, the strategies that we are allowed to pursue 
cannot get us to the $20 billion mark by 2017. To fully 
implement our plan, we require the enactment of legislation 
that reforms our business model. I want to make the point that 
the legislation we are seeking is not merely about closing the 
large budget gap. We want to be an organization that can 
readily adapt to the changing demands of our customers. The 
marketplace for mailing and shipping services is changing and 
the Postal Service requires the legal framework that enables us 
to act with speed and flexibility.
    While we always meet the universal service obligations and 
meet the basic products and service expectations of the 
American public, this legislation could determine whether we 
can continue to do that in the future. Can we be much more 
nimble and efficient and continue to invest in the future of 
the mailing industry? Yes, but we need the flexibility to do so 
under this law.
    In 2006, the Postal Service was given additional 
flexibility by Congress to better compete in the package 
delivery business. We made the most of that flexibility. We 
have created effective products and marketing campaigns and now 
our package business is growing very rapidly. We need this kind 
of flexibility across all of our businesses.
    We believe there are tremendous opportunities to leverage 
that and technology to make mail more compelling as an 
investment for American businesses. We also believe that there 
are great opportunities for the Postal Service to provide 
digital offerings in the future.
    If we are able to operate with greater product and pricing 
flexibility under the law, and if we can do so from a strong 
financial position, I am confident that we can develop and 
market products and services that drive growth in the American 
economy and benefit America's mailing industry.
    Mr. Chairman, we are highly focused on the health of 
America's mailing industry. Mail is a communications channel 
that competes against digital, print, broadcast, and other 
media channels. Industry-wide innovation is very important and 
the Postal Service should have the flexibility to support and 
speed that innovation. We also need to keep mail affordable so 
that it remains competitive and continues to deliver value for 
American businesses.
    Unfortunately, because our financial condition is so 
precarious and the legislative process is so uncertain, we have 
reached the point that we have to consider raising prices above 
the rate of inflation. I believe it is important that we 
discuss this issue today because the prospects for legislation 
have a direct bearing on pricing decisions that may impact the 
health of our business customers.
    Let me conclude with the following thought. The Postal 
Service is quickly moving down a path that leads it to becoming 
a massive, long-term burden to the American taxpayer. The 
legislation that you are considering is a great starting point 
to get us off the path to disaster and onto the path of 
continued financial stability.
    We agree with the overall approach taken by Senate Bill 
1486. It provides important pricing and product flexibility and 
a strong framework for restructuring the Postal Service. 
However, in order to meet the goal of generating a savings of 
$20 billion by 2017, the legislation must resolve our long-term 
health care costs. I believe this is achievable and I am 
greatly encouraged by recent discussions that we have had on 
this topic, which I know we will continue to discuss next week.
    I would like to thank the Committee for taking up postal 
reform legislation this year and I look forward to supporting 
your work and hope to help in any way I can. This concludes my 
remarks. Thank you very much.
    Chairman Carper. Postmaster General, thank you very much. 
Chairman Goldway, please proceed.

  TESTIMONY OF THE HON. RUTH Y. GOLDWAY,\1\ CHAIRMAN, POSTAL 
                     REGULATORY COMMISSION

    Ms. Goldway. Thank you, Chairman Carper, Ranking Member 
Coburn, and Senators Johnson, Heitkamp, and Tester. Thank you 
for the opportunity to testify today. I am pleased to represent 
the Postal Regulatory Commission and to share its views on the 
important topic of Postal reform.
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    \1\ The prepared statement of Ms. Goldway appears in the Appendix 
on page 71.
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    We appreciate your leadership in shaping the debate on what 
must be done to assist the Postal Service and to assure its 
sustainable future. The Committee has convened this hearing to 
explore how the Postal Service can be renewed and reformed, to 
thrive in this changing environment, and to examine the 
solutions set forth in Senate Bill 1486.
    Certainly, there is broad agreement that legislative 
changes are needed to place the Postal Service on a more sound 
financial footing. Nevertheless, the Postal Accountability and 
Enhancement Act (PAEA), contained numerous reforms that were a 
positive force for change toward modernizing the Postal 
Service. Efforts to renew and reform the Postal Service need 
not and should not replace the many positive provisions 
included in the PAEA.
    My written testimony emphasizes the importance of 
transparency and accountability in the efficient provision of 
Postal services, and addresses the Commission's experiences and 
views on a variety of issues addressed in S. 1486. For example, 
the PAEA significantly increased the transparency and 
accountability of the Postal Service by mandating accurate and 
periodic financial reporting that is subject to Commission 
review and public comment.
    However, in my oral statement, I will focus on ratemaking, 
an area where the Commission has broad responsibilities. A 
major focus of the PAEA was ratemaking. It sought to end the 
Postal Service's reliance on unpredictable price increases and 
concerns that the Postal Service was passing along the costs of 
less than optimally efficient operations to mailers through 
cost of service ratemaking.
    The PAEA achieved these goals by introducing a regulatory 
price cap regime for those Postal Service products, over which 
it enjoys a statutory monopoly or possesses market power. The 
Postal Service's rate adjustments for these market-dominant 
products are now at predictable intervals and rate increases 
for each class of mail are capped at the rate of inflation.
    This rate cap approach has had many positive impacts in 
many areas. Most importantly, it has protected rate payers from 
large, unpredictable rate increases that were permissible under 
the old law. The ability to accurately budget for rate 
increases has reduced disruption to mailer operations and 
permitted mailers to plan their mailing programs with regular 
reliability.
    The price cap has also successfully motivated the Postal 
Service to implement extensive cost-saving strategies to 
achieve increases in efficiency. Since the price cap became 
effective, the Commission has reviewed the impact on service of 
many proposed changes intended to reduce the costs of mailing, 
processing, transportation, and delivery.
    Now, degrading the reliability of service is not an 
acceptable way to reduce costs. The PAEA requires the Postal 
Service to enhance service measurement, and the Commission to 
review service performance reports as part of its annual 
compliance determination. The PAEA does, however, provide an 
exception to the price cap, an emergency rate provision.
    It requires that the Postal Service justify this price 
increase based on extraordinary or exceptional circumstances to 
an independent, impartial regulatory body. This has guarded 
customers from unwarranted exigent price increases. This 
protection is particularly important in a government-mandated 
monopoly environment.
    The PAEA sought to eliminate the lengthy and expensive rate 
case litigation that had occurred under prior law. It 
implemented this goal by providing the Postal Service with 
increased flexibility to set prices within the bounds of the 
inflation-based price cap regime, and requiring the Commission 
to design and implement a modern system of rate regulation.
    The Commission developed a simplified process that replaced 
the 10-month adversarial proceeding required under prior law. 
The new expedited process has significantly decreased 
litigation-related expenses for both the Postal Service and the 
mailers and organizations that formerly participated in rate 
cases.
    Since the passage of the PAEA, the Commission has reviewed 
rate adjustment proposals to assure compliance with the law 
promptly and efficiently. Excluding the one exigent rate case, 
rate requests have been completed on an average of just 37 
days. The Commission completed its one exigent rate request in 
86 days. And I think it is noteworthy that no mailer has filed 
a complaint related to a rate adjustment that was reviewed and 
approved by the Commission.
    The Commission stands ready and willing to continue to 
assist the Committee, Congress, the Postal Service, and 
stakeholders to ensure the Postal Service can meet its 
challenges now and well into the future. When Postal reform is 
enacted, the Commission will swiftly and responsibly implement 
the new law to ensure that the Postal Service remains an 
effective part of the overall American communications network.
    Thank you again for providing me the opportunity to testify 
today, and I would be pleased to respond to any questions the 
Committee Members may have.
    Chairman Carper. Good. Madam Chairman, thank you so much 
for your testimony and for your willingness to respond to those 
questions. We are going to have a number of them, I promise. 
David Curtis Williams, welcome back. Good to see you. Thanks 
for your testimony. Thanks for the good work that you do. 
Please proceed.

TESTIMONY OF THE HON. DAVID C. WILLIAMS,\1\ INSPECTOR GENERAL, 
                      U.S. POSTAL SERVICE

    Mr. Williams. Thank you, Mr. Chairman, and Senator Coburn 
and the Members of the Committee. I appreciate the opportunity 
to testify today. Since 2007, the Postal Service was hit with 
rapid volume losses due to the economic downturn and Internet 
diversion. The decline in mail volume now appears to be 
slowing. The financial crisis, though serious, is leveling off.
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    \1\ The prepared statement of Mr. Williams appears in the Appendix 
on page 87.
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    The Postal Service has taken dramatic and successful 
actions to optimize its network to the reduced demand. The 
focus today, however, is on the revenue side, and my office has 
conducted two related studies. The first study found the Postal 
Service's ability to generate needed revenue under the Consumer 
Price Index (CPI) price cap is largely dependent on unlikely 
increases in volume. This is true of any labor intensive 
enterprise subject to price controls.
    The Postal Service's obligation to deliver daily to a 
growing number of addresses alone assures that it will remain 
labor intensive. Mail volume was expanding significantly when 
the CPI cap was deployed. Also, at that time the monopoly, even 
with the universal service requirement, was a lucrative asset. 
These conditions suggested the need for a price control since 
monopolies can be impervious to efficient market forces.
    In 2007, mail growth abruptly reversed. With fewer pieces 
of mail going to a delivery point, each remaining piece of mail 
had to raise more revenue to pay for the cost of delivery. 
Sufficient revenue above inflation was unavailable under the 
price cap. Recent volume losses, combined with the price cap, 
imperil the Postal Service's ability to provide universal 
service while remaining self-funded.
    The price cap was intended to protect trapped monopoly 
customers, but the monopoly has lost much of its value since 
there is powerful competition for each type of mail today, 
advertising, personal communications, business transactions, 
and parcels. Customers have alternatives and the diminishing 
monopoly, combined with the universal service requirement, is 
now a growing liability. Our study suggests adjusting the CPI 
cap to take into consideration volume fluctuations and revenue 
generated per delivery point.
    The second study examined how sensitive postal customers 
are to price increases above CPI. We found that for moderate, 
predictable price increases, postal products generally have low 
price elasticity. That means small increases would provide 
badly needed revenue. As prices are increased, some volume will 
leave, but the associated revenue loss will be more than offset 
by revenue from the price increase.
    The study examined 20 years of data through 2012 and looked 
for any changes in price sensitivity, including from the 
Internet and from the recession. We are not saying that all 
postal customers have a high tolerance for price increases. 
Some customers remain price sensitive. Rather, as a whole, the 
demand for these postal products has low price elasticity. 
Current fears of a postal collapse are likely a far greater 
risk than a small price increase.
    Pricing freedom through efficient market forces should be 
used when possible. Casting them aside in favor of artificial 
controls has been problematic and it is problematic for the 
Postal Service today. Efficient market forces have a long 
history of successfully disciplining companies. If the Postal 
Service loses customers with excessive prices, it will suffer 
the same punishing consequences as any other business.
    New innovative technologies offer many opportunities to 
improve core postal operations and customer service. Vast data 
generated throughout the network can be mined for operational 
efficiencies. Global Positioning System (GPS) can optimize 
routes, manage the fleet, and track packages. Mobile imaging 
can provide customers visual delivery confirmation. Sensors and 
their Radio-frequency identification (RFID) technology can 
digitally link postal equipment and vehicles, providing real-
time visibility in all aspects of the network, joining the 
Postal Service to the Internet of things.
    In this remarkable but highly imperfect digital age, 
citizens and businesses face fundamental problems. The loss of 
privacy, security, and confidentiality; the fragmentation of 
messaging--Toyota could not connect the dots between written 
correspondence and email complaints several years ago--the 
difficulty of navigating e-government services, the risk of 
buying online from unknown individuals, uneven broadband and 
banking access, and expensive e-commerce middlemen that inhibit 
entrepreneurs and small businesses.
    The Postal Service can help address these problems. Secure 
electronic messaging can preserve privacy, security, and 
confidentiality. Storage and integration services can give 
people tools to organize communications in a multi-channel 
world. The Postal Service can offer seamless e-government 
services by supporting the digital platform with its network of 
post offices and delivery carriers.
    The creation, storage, and validation of digital identities 
would protect against the risks of transacting with unknown 
people and businesses. Post offices can become centers of 
continuous democracy, acting as hubs to gather citizen input. 
The sale of single-use cash cards and the cash redemption of 
digital currency can provide alternatives for the unbanked, 
enabling their participation in commerce.
    And virtual post office boxes can offer citizens and 
foreign buyers of U.S. goods delivery of their packages 
anywhere and anytime, and support businesses with back-end 
operations such as micro-warehousing. The Postal Service 
already has a physical network underlying the emergent wired 
digital infrastructure. By further enabling that network, the 
Postal Service can assure that e-commerce is seamlessly 
supported by powerful fulfillment services for physical goods.
    The Committee's attention to revenue and innovation is 
tremendously important and pre-funding, which the Committee 
will take up next week, is also a substantial factor in the 
plight of the Postal Service's finances. Part of the need for 
the price increase and absence of investment capital for 
innovation are directly tied to the financial drains from pre-
funding. Thank you.
    Chairman Carper. Well, thank you. Boy, you had a mouthful 
there, did you not? That was good stuff. I am going to ask the 
Postmaster General just to react to some of what Mr. Williams 
has just shared with us in terms of additional things that we 
can do to help the Postal Service to reduce its costs. He gave 
us a whole laundry list of things that the Postal Service can 
do to help us on the revenue side. So just be thinking about 
reacting to those ideas.
    My colleagues have heard me talk about this before. When I 
think about the problems that the Postal Service faces and has 
faced for a number of years, I go back to another legacy 
industry and that is the auto industry. It was not that many 
years ago where we were in the tank and we had seen our market 
share drop from about 85 percent, 30 or 40 years ago, to about 
45 percent.
    And the question was what are we going to do about it? Are 
we going to give up, just let everybody else in the world take 
the business away from us and send the auto industry down the 
tubes or not? And they chose not.
    A couple of things happened there and I think they are 
relevant for us today. One, they right-sized their enterprise. 
They said, we have more manufacturing plants than we need given 
our market share. They had more parts plants than they need, 
they have more employees than they need.
    And what they did, they did not just fire people. They did 
not abrogate labor contracts, but they decided to right-size 
the enterprise, in a humane way. And they also decided, how can 
we use what we have in order to generate additional revenues? 
And they are generating a whole lot of revenues. They are 
generating the kind of products that people want and are 
willing to pay for. So I think there are some lessons to be 
learned there in terms of right-sizing the enterprise, and we 
have those opportunities, and what we are trying to do is just 
that.
    Remember when people used to kind of joke and say that the 
big three--Ford, Chrysler, General Motors (GM)--were really a 
provider of health care to several hundreds of thousands of 
people and they had a subsidiary that made cars, trucks and 
vans? Well, when you look at the Postal Service, it is not that 
bad in terms of being a provider of health care that has a 
subsidiary that delivers packages and mail.
    But the health care costs are substantial. And in the auto 
industry what they have done, United Automobile Workers (UAW) 
steps up and says, We would like to take over running the 
health care for our members and for our retirees, and we want 
to do it--we think we can do it in a more cost-effective way. 
They call it the Voluntary Employees Beneficiary Association 
(VEBA). They have done it and it has actually worked.
    I know there are discussions going on with the Postal 
Service and with your unions and other employee groups, and I 
just encourage you to continue to do that because that is huge. 
As we try to find ways to bring down costs, that is just 
critically important.
    I like to say that in adversity lies opportunity. This 
challenge from the Internet, from folks that are taking away 
your first-class business, that challenge is going to be there 
for a long time. But with that challenge comes real 
opportunity. When I checked our mail last week, we get all 
kinds of stuff. I know my colleagues do, we all do, all kinds 
of stuff in the mail.
    Last week I got a little envelope from you, from the Postal 
Service, and it is a mailer here that talks about priority mail 
express and how the Postal Service will deliver 1-day, 2-day, 
3-day service. You can deliver it on Sunday, guaranteed 
delivery, insurance paid for up to a certain level. Really good 
stuff.
    This is the kind of thing that has a huge, huge upside 
potential, I think. And in an age when a lot of people still 
want to deliver stuff on Saturdays or Sundays this kind of 
thing could help us. I just applaud you for this kind of 
innovation.
    I want you to go take a couple minutes and respond to some 
of what David Williams has been giving us, particularly his 
laundry list, not just on the cost side, but his laundry list 
on the revenue side. Go ahead, please.
    Mr. Donahoe. Thank you, Mr. Chairman. I appreciate the fact 
that, on the mailing we sent you, 11 scans is our average, so 
we provide a lot of visibility on those packages, too. Priority 
Mail is a heck of a deal.
    Let me respond to Dave Williams. Dave and the IG have been 
excellent partners with us on a number of subjects over the 
past few years. We have asked them to take a look at 
opportunities, and he and his team have come back with a lot of 
good suggestions.
    I think the key thing for us to keep in mind looking 
forward, and we have looked forward in our business plan and 
even beyond there--5-year business plan, 10-year look ahead--
the revenues in the Postal Service look to be relatively stable 
at about $65 billion, $66 billion, and that is given a volume 
decrease of about 5 percent annually in first-class.
    That includes single piece and commercial, fairly stable 
volumes in our standard mail, with some package volume 
increase. We have been experiencing a substantial package 
volume increase and we think we will see that for the near-term 
future.
    Now, given that the other thing that we have to consider is 
the fact that even though we have taken substantial costs out--
300,000-plus people in the last 10 years, 200,000 of them in 
the last 5 years, and substantially reduced the costs bending 
the cost line by $16 billion--we are still facing substantial 
problems going forward.
    The key issue, even if we get to the point where we are 
debt-free, every year with a cost base of $61 billion or $62 
billion that we have, we will be facing inflationary costs, at 
2 percent, of about $1.5 billion a year. So we have to figure 
out what we can do going forward.
    Now, we think that you cannot cut your way out of this 
problem. I agree 100 percent with you. I think that the Postal 
Service has taken some very good actions in the last few years, 
not just in the area of packages, but in the area of mail.
    Just this week we are spending our time in the field--I was 
in Minneapolis yesterday for Postal Customer Council Day--and 
we are spending a lot of time with our customers out there, 
talking to them about how you actually start to merge the 
technology of the Internet with mail so it is relevant, so it 
is actionable, so you get some of the mail. That piece of mail 
you had, it would be great if you could order boxes with one 
click off of your smart phone and get that delivered. That is 
where we need to go from a mail perspective.
    Dave's comments on pricing? We agree. We need flexibility. 
Our Board is responsible for the long-term health and welfare 
of this Postal Service and the industry. They need the 
authority to be able to set prices and the freedom to do it 
quickly. So a lot of the things that Dave has talked about, the 
flexibility, the speed, the market, the new opportunities out 
there, areas in digital--and we will talk about that in a 
little bit--we are in full agreement. And we think that we need 
the flexibility and your law gives us a very good starting 
point down that road.
    Chairman Carper. Good, thanks. And before I turn it over to 
Dr. Coburn, I will just say, as my staff has given me some 
numbers, they said, How many processing plants did the Postal 
Service have in 2008? The number is 614. How many do we have 
today? 323. In 1999, there were about 800,000 employees; today, 
I think we are just under 500,000. But we have not eliminated a 
lot of post offices, especially a lot of rural post offices, 
and I understand this is something that Senator Tester has 
worked on, Senator Moran worked on, others as well.
    Rather than closing 3,000 or 4,000 post offices, you have 
come up with a way you can actually continue to keep post 
offices open or use these other ways in the communities, using 
rural letter carriers, but there are a variety of ways to 
continue to provide services to rural communities. They do not 
have any access to the Internet, have not had it, will not have 
it for years. But I applaud the way that you have really tried 
to right-size the enterprise. I think you are getting a lot 
closer to a sweet spot and we applaud that. Dr. Coburn.
    Senator Coburn. I thank all of you for your testimony. 
General Williams, let us talk about the price of elasticity 
that you talked about. You said in general, but you said there 
were certain segments that are more inelastic than others. Can 
you quantify that for us? What are those segments?
    Mr. Williams. The study showed fairly broad inelasticity. 
Actually, if my heart went out to somebody, it would be the 
small city and town newspapers. They have a very low margin, 
they have been hit by this wave of creative destruction that 
has hit all the media, and they deliver through the mail. So I 
would say that they would certainly meet the----
    Senator Coburn. What other segment?
    Mr. Williams. I think that probably at the margins, as I 
said, it is all pretty low, but the not-for-profit 
organizations will be another that I would turn to and be 
careful in assuring that they----
    Senator Coburn. So under this bill that we have which gives 
pricing authority to the Post Office, can you imagine a 
scenario where they would not consider total revenue volume 
associated with price increases, and look for that sweet spot? 
Would anybody not look at that and try to make that 
determination?
    Mr. Williams. No. I think that is exactly where the 
Governors and senior management come in. I think it would go 
exactly the way you just outlined.
    Senator Coburn. Well, that is exactly what most other 
businesses do.
    Mr. Williams. Exactly.
    Senator Coburn. And since, as you said, the monopoly power 
is a hindrance now rather than an advantage, can you think of 
any reason why we should not have, in a bill, the ability for 
pricing power based on markets, competitive markets, and their 
competition and the service and quality of what they offer?
    Mr. Williams. We believe that, as I said, the market forces 
are adequate and very appropriate to this situation. We are 
available to you and we are available to others to search out 
any small areas, but broadly, those are our beliefs.
    Senator Coburn. All right, thank you.
    Mr. Williams. Yes, sir.
    Senator Coburn. There has been some criticism of that 
study. Can you lay out the methodology that was used in that 
study? You stand behind that study as accurate, do you not?
    Mr. Williams. We do. We think it has been supported by many 
other earlier studies. There have been some occurrences that we 
tried to isolate and look at to make sure that those had not 
changed, this norm of inelasticity. We looked at the 20-year 
period that just ended in 2012. We tried to isolate the period 
before the Internet. We looked at the whole period, and then we 
tried to isolate the period before the Internet, early 
adoption. There was also a flat period and the mature adoption.
    We looked at the recession. And during that period, also, 
there were two large price increases, in 2000 and 2001. We 
tried to isolate those as intervening variables and throw it up 
against the regression and it would not budge. It appears to us 
that we could definitely stand behind the study as others have.
    Senator Coburn. The people that the Post Office compete 
with, how do you think they determine their prices? How do you 
think FedEx made a determination to raise their rates 
yesterday? Do you think they did a study and looked at what the 
market could bear based on the quality of service that they 
were offering?
    Mr. Williams. Yes, sir.
    Senator Coburn. Made a calculation?
    Mr. Williams. I am certain they did, as well as their 
competitors. FedEx and UPS annually have--their increases have 
been about twice the rate of inflation, as ours were held 
inside inflation. The Postal Service's competitive side is in--
they have their feet wet now and they have been involved in 
increases. They have increased above inflation and those areas 
have grown.
    The British just got rid of their price cap for virtually 
everything. We are a pretty good deal. Worldwide we do not 
charge as much as the other world posts.
    Senator Coburn. But we are also losing billions of dollars 
a year.
    Mr. Williams. That is the price we----
    Senator Coburn. And it is true that, I think, this week the 
British Postal Service becomes privatized.
    Ms. Goldway, you talked a lot about predictability for 
rates so mailers are not caught off-guard, but in doing so with 
the rate cap, wasn't the Postal Service's current financial 
crisis predictable?
    Ms. Goldway. Yes, prices are predictable. Under the current 
price cap, yes, prices are predictable.
    Senator Coburn. The crisis that we face, was it not 
predictable?
    Ms. Goldway. Well, I guess it was not predictable, no.
    Senator Coburn. I would like to enter into the record my 
statements from a hearing in 2007, which I will give to the 
clerk in a moment.\1\ It was predictable. I predicted it. When 
we passed the last Postal bill, I said we would be back here 
because we are not setting up a competitive market force, an 
independent organization that can respond and compete with what 
they have to compete with, and that markets ought to determine 
rates, where they can, and we do not allow the monopoly.
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    \1\ Statement for the Record is in the Appendix on page 223.
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    Because it is no longer a force. It is an asset in terms of 
what the Post Office can do in terms of an asset that they can 
sell for--they can deliver better anywhere else, anywhere in 
the country. They go the last mile. So that is an asset. But 
the risk of a monopoly power of the Post Office is gone.
    So we now have in front of us an organization that is price 
controlled and labor controlled. And I can tell you, we are 
never going to solve the problems of the Post Office if those 
two things stay there. So what we have to have is fair 
treatment for the employees in the Post Office and flexibility 
for the Post Office to maximize its return on the service that 
it has to sell.
    So my question again is, talking about predictability for 
rates for the mailers, but that predictability led to a 
predictable consequence and that is billions and billions and 
billions of dollar losses. I would enter into the record the 
number of Postal employees since 1926\1\ and the attrition that 
has happened because of this. And yet, the cost reduction still 
is not good enough because we have no pricing power that is 
market-based. We have no pricing power that is market-based. So 
I would ask that this be entered into the record as well as my 
statement from 2007, 4 months after the last Postal bill was 
passed.
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    \1\ The chart referenced by Senator Coburn appears in the Appendix 
on page 331.
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    Chairman Carper. Without objection.
    Senator Coburn. I want to talk to you about a touchy 
subject with your employees and it is called arbitration. In 
our bill, it is presently the law that an arbitrator cannot 
consider the financial health of the Post Office in arbitrating 
a labor dispute with the Post Office. Is that correct?
    Mr. Donahoe. That is correct.
    Senator Coburn. Do you know of any business in the world 
that could be successful in negotiating their labor contracts 
when they, in fact, cannot consider their financial health when 
they negotiate their labor contracts?
    Mr. Donahoe. No. In a situation where you have binding 
arbitration, you have to consider not only the current 
financials, but you have to look ahead. And that is what we are 
asking for with this legislative, the ability not only to look 
at it from an arbitrary perspective, but to make some changes, 
in the bill, around employee retirement costs and everything 
else, because we know the revenues will be fixed at about $65 
billion to $66 billion and we have to control these costs.
    Senator Coburn. All right. I am out of time. I will come 
back.
    Chairman Carper. Thank you, Dr. Coburn. Let me just go down 
the list to welcome Senator McCain and Senator Pryor. Next was 
Senator Johnson. He is next in line when he returns. Senator 
Tester, you are next, and after you, Senator Heitkamp, Senator 
McCain, Senator Pryor. Thank you.

              OPENING STATEMENT OF SENATOR TESTER

    Senator Tester. Thank you, Mr. Chairman and Ranking Member 
Coburn, and I want to thank the panel for being here today. I 
agree you guys need better price flexibility. There are no ifs, 
ands or buts about that. I would also say that if the goal here 
is to privatize the Postal Service, then we ought to have a 
bill to do exactly that and move forward. I think it would be a 
mistake, but nonetheless, we ought to have that debate, change 
the Constitution and do it and move forward.
    My concern revolves around rural America. The Postmaster 
General knows that. We have talked many times. I believe that 
some of the best customers of the Postal Service happen to live 
in rural America. They really do depend upon it. As of July 1, 
2002, the Postal Service changed its delivery standards for 
much of rural America. Dakotas, Montana, Nebraska, reductions 
were made in the alternative means of transportation, and as a 
result, in those States, overnight delivery is almost 
impossible.
    In fact, I would say--and I got that flyer, too, that the 
Chairman got. It was a good flyer. But I would question whether 
you could have overnight delivery to my house in Montana on a 
weekday, but much less on a Saturday or Sunday. I would love to 
see it happen. I do not think it is possible right now.
    And the reason is, is because those standards have changed. 
Many of the processing facilities are gone in the rural areas 
because of volume. I mean, you guys made the call and I 
understand that. I think it was a mistake, but the call had to 
be made one way or the other. And then the Postal Service 
continues to tell me that the reduction in hauling mail by 
plane has not impacted these delivery standards.
    So the question I have, to get to the question, is, were 
there any studies conducted before the July 1 reduction in the 
alternative methods of transportation services?
    Mr. Donahoe. Yes, Senator, we go through what is called an 
area mail processing study and we take a look at everything--
all the effects, the cost savings that come out of that, and 
any service interchanges that we have had proposed.
    Senator Tester. Did those studies indicate that those 
reductions to services would not impact rural America?
    Mr. Donahoe. The studies that we have put together show 
where we have to make service standard changes in order to get 
the savings out of the reductions. We have made those and we 
have maintained overnight service in large portions of rural 
America.
    Senator Tester. So what you are saying is, the study--and I 
do not want to put words in your mouth. The study indicated 
that there would be minimal impacts by this? Is that fair to 
say?
    Mr. Donahoe. It depends on how much of a change you are 
going to make.
    Senator Tester. With the changes that you actually did 
make. I mean, because the changes have been made. They are real 
life changes now.
    Mr. Donahoe. Right.
    Senator Tester. Did the studies indicate that if you made 
those changes, because you did it proactively----
    Mr. Donahoe. Right.
    Senator Tester [continuing]. That it would have minimal 
impact on service in rural America?
    Mr. Donahoe. Yes, it would. As we have made changes in 
service across the country, we started with the premise that 
about 40 percent of all the mail that we delivered was 
overnight. The goal was to maintain as much of that as 
possible. With the first round of changes, we have been able to 
maintain approximately 35 percent.
    There were some places we had to downgrade from 1-day to 2-
day. Again, it is about 5 percent of the total volume. But we 
have been able to maintain overnight service in rural areas.
    Senator Tester. OK. I get you back to rural America--I get 
back to Montana, rural America, every weekend. I go back, 
travel the State. In August, we got a chance to do some pretty 
extensive traveling. And I can tell you that almost with every 
stop, I did not hear about delays of 1 day. I have heard mail 
delivery takes 3, 4, or 5 days.
    And I can tell you, my wife and I just mailed a mortgage 
check on Monday and I said, It is not going to get there. It is 
not going to get to where it needs to go by Wednesday or 
Thursday. It is going to be a week. And we are probably going 
to get dug for that, and that is not the old mail service we 
used to have, to be honest with you, and that is where my 
challenges are.
    If we get fined for that, then bring on UPS and FedEx 
because I cannot do it. Do you see what I am saying? And that 
is the challenge. So my question is, look, there is not anybody 
that lives out there. There is a million people in the whole 
State of Montana. And how many people live in Pittsburgh? A 
million people, more than that?
    Mr. Donahoe. Two.
    Senator Tester. Two million. So if you are looking at a 
business model that is based upon where you are going to make 
your money, you are probably not going to make a lot of money 
in Big Sandy, Montana. The question is, the Postal Service was 
set up to serve people, I think. Is that taken into the 
equation when we are closing mail processing centers, we are 
not using planes to move mail in rural America? Are those kind 
of things taken into account?
    Mr. Donahoe. Absolutely.
    Senator Tester. And so, what is the answer when the postal 
standard has changed from overnight, 1 to 3 days, to 3 to 5? Is 
that deemed acceptable?
    Mr. Donahoe. No. We have not changed any service standards 
to three to five, except in areas where we go, say, in Alaska--
--
    Senator Tester. I got you on that, right? But the reality 
is, it has changed, and I am not going to put words in Heidi 
Heitkamp's mouth, but my guess is she can verify it in North 
Dakota, too, because those five States--I think there were 
five--were the ones that the standards were changed in. And it 
is closer to five than it is to three.
    Mr. Donahoe. We measure our mail--whether it is standard 
mail, first-class, periodicals--everything that is measured has 
continued to either stay at, or improve on, service levels, as 
well as Priority Mail. I would be more than happy to sit down 
with you and share all the data. We take our universal service 
responsibility very seriously. You have never heard me talk 
about not doing that, but we are faced with a financial 
crisis----
    Senator Tester. I got you.
    Mr. Donahoe [continuing]. To try to figure out how to keep 
our head above water.
    Senator Tester. And all I am trying to get to is if I am 
swimming upstream here and the goal here is to maximize 
profitability at the expense of rural America, just tell me.
    Mr. Donahoe. No, it is not. It is universal service. It is 
to keep mail service affordable, not become a burden to the 
American public, be able to provide reliable, responsible 
service, and eventually, through this legislation get the cloud 
of financial turmoil away from us.
    Senator Tester. OK. I would just tell you, I do not doubt 
that your studies say what they say. I do not doubt that a bit. 
I can tell you, in reality, because I live there over half of 
my time. I live on that farm 12 miles west of Big Sandy. I can 
tell you, in reality, it ain't working that way, not in that 
place.
    And I do not ask for any special treatment, by the way. I 
do not want special treatment. I just want to be treated like 
my neighbors. So if I am being treated that way, so are my 
neighbors. So I bring that up. Just take a peek at it to see 
what you think.
    Mr. Donahoe. Absolutely.
    Senator Tester. As this legislation moves forward and we 
have that debate--and just one more question and then I will 
kick it over--is there going to be further consolidation of 
mail processing centers or post offices while we are having 
this debate in Committee or on the floor?
    Mr. Donahoe. No. The bill, as it is written, puts a 2-year 
freeze on mail processing facilities. We have some scheduled 
for 2014. We would not advance any of those things to try to 
get under the wire. From a post office perspective, when I 
visited out in Montana last year, people told us, Keep our 
office open, keep our local identity. If you have to change 
window time, we understand that, but give us access to mail. We 
have done that.
    Senator Tester. Fair. So what you are saying is, there 
would not be any post offices closed or mail processing centers 
closed while we are debating this bill before it becomes law?
    Mr. Donahoe. No. We have done what we needed to do for this 
year. Any further changes would require us to service the 
interchange and we will not do that.
    Senator Tester. Thank you for your patience, Mr. Chairman.

             OPENING STATEMENT OF SENATOR HEITKAMP

    Chairman Carper. You bet. Thanks for those questions. 
Senator Heitkamp.
    Senator Heitkamp. Thank you so much, Mr. Chairman, and 
Ranking Member, Dr. Coburn. No big surprise here. We are just 
going to follow on to Senator Tester's testimony. And I just 
have a basic question, and I do not mean to be sarcastic about 
it. But I need an answer from you, Mr. Donahoe. Do you believe 
that the highly rural areas of America deserve the same level 
of service as suburban and urban areas of this country?
    Mr. Donahoe. I do, and I believe that even the offshore 
areas like Hawaii, Alaska, and Puerto Rico do, and we 
consistently measure and stay on our mission to provide 
universal service. I believe that fully.
    Senator Heitkamp. And I believe you believe that answer. 
But there is always a constant discussion that we have about 
what your studies show and the reality of what our constituents 
experience dealing with the post office. And I want to just 
followup on what Senator Tester's discussion was about having 
an expectation that, if you put your mortgage check into the 
mailbox and it is picked up, you will, in fact, be able to pay 
your mortgage on time if it is due 3 days from then.
    And I do not think that anyone in rural America anymore 
believes that is true or trusts it. And it has created a sense 
that the constitutional obligation that was recognized, the 
importance of the Postal Service, the importance of offering 
this opportunity to every place in the country is not being 
met. And so, I do not want to belabor that point. I do want to 
tell you that you can do all the studies in the world, but that 
is not the experience that people are having in rural America.
    The other question that I want to get to, and it really 
goes to the future of the post office and the future of the 
Postal Service, you heard Mr. Williams relay a lot of 
opportunities, and I have been on this Committee now for a very 
few months, certainly do not have the extent of the experience 
that the Ranking Member and that the Chairman have on this 
debate.
    But yet, I constantly hear good ideas, what seem like good 
ideas that ought to be explored about how we can make the post 
office more relevant, and certainly rural post offices more 
relevant. So I am curious, in the last 12 months since I have 
heard all this discussion, what steps have you taken, as the 
Postmaster General, to identify and recognize and begin to 
implement some of those good ideas? Give me three examples.
    Mr. Donahoe. Well, let us start with Priority Mail.
    Senator Heitkamp. Priority Mail has been around a long 
time. I have used it a lot.
    Mr. Donahoe. Right.
    Senator Heitkamp. I am talking about innovations, not 
Priority Mail. I am talking about different kinds of things, 
whether it is digital--and you heard Mr. Williams give you a 
whole litany of ideas.
    Mr. Donahoe. Right.
    Senator Heitkamp. I want to know, in that space, what you 
have done.
    Mr. Donahoe. I will start with digital.
    Chairman Carper. Could I interrupt, please, for a second? 
Let him do four, because what they have done, they have re-
branded Express Mail, and I think in a very smart, thoughtful 
way that can grow revenues by a half-billion dollars or more a 
year.
    Senator Heitkamp. Mr. Chairman, I get that. I am a faithful 
user of the mail service. I have used Priority Mail. It is 
easy, it is the packaging I agree with. But obviously, those 
moves have not made the post office more lucrative or have not 
solved the problems that we have today. So I want to know about 
other innovations.
    Mr. Donahoe. Well, they have made the post office more 
relevant. Our revenue off packages alone has grown about $1.5 
billion in the last 3 years. That goes a long way.
    In terms of digital, we have established a digital group. 
We are working with a very good contractor in that area, In-Q-
Tel. We, as a matter of fact, have just been awarded the 
contract, the first contract ever, to be the intermediary 
within the Federal Government on what is called the F-6 
Program. We are very active in the digital area around starting 
to work on products that would help to set a platform for 
authentication of who you are. Just like Mr. Williams 
mentioned, the work is already being done right now in terms of 
getting on the Internet.
    Secure digital messaging, there is a lot of work to be done 
there. We think that there are big applications in the health 
care world, the financial world, and for personal services. We 
also are exploring the whole concept of digital vaulting with 
our contractor. That is digital.
    Senator Heitkamp. And when you did those projects, and you 
looked at them, what is the revenue benefit of those?
    Mr. Donahoe. Five year projects $758 million.
    Senator Heitkamp. For which projects?
    Mr. Donahoe. For that digital set of projects. We have 
worked with In-Q-Tel and we have done work with their marketing 
group. We have a business plan that is established with a pro 
forma look ahead for 5 years, and the financial gains that we 
think we can have in 5 years are about $758 million. A lot of 
work has been done.
    But I will tell you, I have not spent a lot of time 
publicly talking about all of those types of things because the 
bottom line is that we have to address the cost factors in this 
organization. You can grow a business like digital, a billion 
dollars; we introduced a product 2 years ago called Every Door 
Direct, part of our standard mail. We have grown that $800 
million off of a base of zero in 2 years.
    Inflation in our organization pushes costs by $1.2 to $1.4 
billion a year. We have to get after the costs as well as 
innovation and growing new products.
    Senator Heitkamp. Would you agree that some of what you 
would need to do in terms of looking at cost containment, 
business plans, and business models without incorporating or 
merging the sense of what the new lines of revenue could be, 
you could be making decisions on the cost side that would 
greatly reduce or eliminate your opportunity to be relevant in 
a new product line? Would you agree that is true?
    Mr. Donahoe. No. I think that there are big opportunities 
right now. As we work with mailers--I spent yesterday in the 
State of Minnesota in Minneapolis. We talked specifically with 
300 customers about the growth of mail. Mail has to be 
relevant----
    Senator Heitkamp. I only have a few more seconds here, but 
I do want to point out that if you close every rural post 
office in North Dakota, you will not have an opportunity for 
new revenue.
    Mr. Donahoe. There is no proposal to close any post 
offices. As a matter of fact, in your State, we are expanding 
some post offices, Williston and a few others, because of the 
oil boom. We are responding to that and there is no interest in 
closing post offices. You have never heard me say that. We have 
made changes of the Post-Plan that helps us from a bottom line 
perspective, but it gives customers what they are asking for, 
access to the post office and rural town identity.
    Chairman Carper. Senator Heitkamp, thanks for those 
questions and for your passion for these issues. Senator 
McCaskill, if you are ready, you are next in line. We had a 
couple people who have come and gone and they may slip back, 
but you are next up if you would like.

             OPENING STATEMENT OF SENATOR MCCASKILL

    Senator McCaskill. Well, this is an occupation where about 
half the time we all pretend we are ready even when we are not, 
do we not? So I think I will go ahead and ask questions. I am 
ready.
    Chairman Carper. You have never had a problem with being 
ready.
    Senator McCaskill. I am ready. I want to talk a little bit 
about the expensive part of our infrastructure, and really what 
is a reality. I obviously have come out strong for 7-day 
delivery. I believe it is a competitive advantage we have and 
that if we give up that competitive advantage it is a mistake, 
to give up that competitive advantage because this is now a 
competition. We are competing.
    One of the things that I need clarification on is what we 
are charging our competitors. The growth in the UPS and the 
United States Postal Service is going to be in packages. I 
mean, it is pretty obvious. I know in my life, I spend a lot 
more time clicking than I do driving in terms of shopping.
    So if we are competing for package delivery, the growth 
area, answer this question for me, Mr. Donahoe. Is, in fact, 
UPS paying less to go down that last mile than I am? Are they 
not using us for their last mile of delivery in the rural 
areas? Are they not using our infrastructure, our competitors?
    Mr. Donahoe. Yes. UPS, FedEx, and a number of private 
companies use us for last mile. It is called Parcel Select. 
Drop at the post office, you get your mile delivery.
    Senator McCaskill. And do they get it cheaper than I get 
it?
    Mr. Donahoe. Well, there is no real access for you to have 
on that product, unless you would actually bring it to the post 
office. If you were mailing----
    Senator McCaskill. No. If I am sending a package to a 
friend of mine in rural Missouri----
    Mr. Donahoe. Right.
    Senator McCaskill [continuing]. Is my cost less expensive 
or more expensive than what you are charging your competitor?
    Mr. Donahoe. Different products. You would use Priority 
Mail. If a flat-rate box, you would pay somewhere over $5 
depending on the size of the box. That takes advantage of our 
whole network. We collect it, we process it, we transport it, 
we deliver it. What happens with UPS, FedEx, and some other 
customers, they bring mail and sorted already to the ZIP code, 
drop it with us, our clerks sort it and carriers deliver it. It 
is only a small portion of the work, so you do not charge 
somebody the entire amount for a small portion of the work.
    Senator McCaskill. Well, I guess what I am worried about is 
that we are not seeing them as a competitor, that we are seeing 
them as a customer. And they are surfing off the most expensive 
part of our Internet, of our architecture. I mean, they are 
using the part that is costing us so much money. And I do not 
feel like the agreements that you have entered into with them 
treat them as a competitor, but rather, treat them the same way 
you treat every other customer. Is that an unfair 
characterization?
    Mr. Donahoe. No. We have costed these agreements out like 
any other business. The fortunate thing about our package 
business, it is competitive so we can enter into contracts and 
these contracts make money for the Postal Service. The package 
business is a very competitive industry. UPS versus FedEx 
versus other companies like LazerShip, who nobody even talks 
about. LazerShip is out there competing with people making $10 
an hour. It is very competitive. Price, affordability, 
dependability, visibility is critical to win in this package 
game.
    Senator McCaskill. But they are using you because you are 
cheaper than them doing it themselves.
    Mr. Donahoe. We have increased the market share in the 
package business by two points. We have also secured a 
substantial number of customers coming in for the Last Mile 
Delivery that have bypassed some of the other competitors. We 
have grown our business.
    Senator McCaskill. I think you understand the point I am 
making.
    Mr. Donahoe. Sure.
    Senator McCaskill. I mean, if you spend--if this is a 
telecom company and they have, in fact, are a whole sector of 
telecom, the people who worked and did the infrastructure, they 
are getting a huge payoff for the infrastructure from their 
competitors, a huge payoff, especially in rural areas. And we 
have done all kinds of things to assist with that.
    I really want to know what the specifics are of the 
agreements. I want to know what your competitors are paying for 
the----
    Mr. Donahoe. We would be more than happy to sit down----
    Senator McCaskill. The irony is, it is the most competitive 
part of the business, it is where the most growth is, but I do 
not sense that you are exacting a competitive advantage based 
on the fact that we have made the investment, the United States 
Postal Service has made the investment, in the delivery system 
they must use. Why do we not have them do it themselves?
    Mr. Donahoe. We would be more than happy to sit down and--
--
    Senator McCaskill. Do you know who would be cheaper then? 
If they had to do their own Last Mile Delivery, guess who would 
be cheaper.
    Mr. Donahoe. We know we are cheaper and that is why they 
use us for Last Mile Delivery.
    Senator McCaskill. Guess how much cheaper we would be. A 
lot cheaper.
    Mr. Donahoe. We are pretty cheap now. We are the best value 
out there for anybody mailing a package, Priority Mail or 
anything else.
    Senator McCaskill. I would like to get the specifics of the 
agreements that we have with our competitors on package 
delivery----
    Mr. Donahoe. We will sit down----
    Senator McCaskill [continuing]. And I want to make sure 
that we are taking advantage of what we have as opposed to 
stuck in a mode that they are just other customers.
    Mr. Donahoe. I think it will be valuable to show you what 
we do, what we do with some of the large contracts like FedEx 
and UPS. I think it would be good to see what LazerShip and 
some of the other competitors charge, too. It is a very 
competitive industry.
    Senator McCaskill. Have you modeled out what would happen 
if you decided not to carry their packages for them? Have you 
done an economic model of what they would have to charge to 
send their packages versus what we charge?
    Mr. Donahoe. No, we have not done that. I am sure they have 
done that model and they make the decision using us based on 
what their prices are.
    Senator McCaskill. But we are the ones that have it. We 
have the architecture. Why have we not modeled it out?
    Mr. Donahoe. Well, think about it this way. If our letter 
carriers and rural carriers are driving down that road every 
day, 5 days a week for mail in the future, 6 to 7 days a week 
for packages, it is in our best interest to have as many 
packages on that route as possible. That is our goal.
    Senator McCaskill. But the goal----
    Mr. Donahoe. And we have to do it at the most reasonable 
price, which we have very smart people in our organization that 
have put those prices together. We are not giving anything 
away, but we have to take full advantage of the network and 
load that network up with as much mail and packages as we can. 
That is why we are here. We have lost 27 percent of our mail 
volume. You have to make some changes----
    Senator McCaskill. Exactly right. And, Mr. Donahoe, what I 
am asking you to do is what any business would do. Model out 
what they are going to have to charge if they do not use you 
versus what we charge, and that is the way we would carry more 
packages. We would get more of their business.
    Mr. Donahoe. That is true in some cases, but to a large 
extent--I will give you an example. One of the competitors 
right now uses a model that determines whether we get the 
packages or not based on the density of the route that they 
have on any given day. That is how technical and how advanced 
the technology is. So some days we get it, some days we do not, 
based on how many packages are in a certain city block.
    This is not just on a whim, giving us mail on 1 day, or 
not. It is very specific, it is very technical, and our people, 
I think, have done an excellent job pricing and growing this 
business to grab a large chunk. We have picked up two points in 
the package business in what is a very competitive environment.
    Senator McCaskill. And I think that you are not using every 
advantage you have in that competitive market. My time is up 
for this round. I have a lot of other questions for the record.
    Mr. Donahoe. We will be happy----
    Senator McCaskill. At a very minimum, you should be doing 
the modeling as to what it would look like if you no longer 
allowed them to use our carriers and whether or not we could 
get a competitive advantage.
    Mr. Donahoe. We have best guesses, but it is not perfect. 
But believe me, the technology is there to make it a lot more 
specific on a daily basis. We will come over and sit down with 
you.
    Senator McCaskill. That would be great.
    Mr. Donahoe. Thank you.
    Senator McCaskill. Thank you, Mr. Chairman.
    Chairman Carper. Sure. Dr. Coburn, go ahead.
    Senator Coburn. Just a little comment. By statute, you 
cannot sell that product below your cost.
    Mr. Donahoe. No.
    Senator Coburn. So there is no subsidy now that is achieved 
for that that is transferred to other mailers because we are 
doing this. This is gravy for them. By law, they cannot give 
UPS or FedEx a price below their cost.
    Senator McCaskill. I do not want them to. I want them to 
give them a higher price on the cost.
    Senator Coburn. I understand that, but that is a market-
determined price. So there is no subsidy. As a matter of fact, 
packaging business is subsidizing the rest of it now.
    Senator McCaskill. I get that. I think you and I can 
discuss this, but I think we would agree. I probably was not as 
articulate as I should have been trying to make the point. I am 
not asking them to charge them less. That is the issue. I want 
them to charge them more because they are using something we 
have and we would gain a competitive advantage by charging them 
more.
    Senator Coburn. Well, actually, I actually think they have 
done a pretty good job in what I have looked at in terms of 
pricing their product to get as much volume as they can. The 
higher the price goes, the lower their volume goes and that is, 
again, giving them the ability to make a decision based on the 
price elasticity of the market they are in to get as much as 
they can, and there may be, in this area, some real 
inelasticity as far as the lower end on the price.
    Senator McCaskill. That is why I want to look at all the 
specifics.
    Senator Coburn. That is what this bill is all about, to 
give them the flexibility so that they can get the most revenue 
based on this wonderful asset that we have called the U.S. Post 
Office.
    Senator McCaskill. I agree with that. I do agree with that.
    Chairman Carper. Thank you. I think that was a good 
exchange. Chairman Goldway, you have not been getting enough 
questions here. We are going to ask you at least one. But Mr. 
Williams argued a few minutes ago that the Postal Service could 
change prices without losing volume. Dr. Coburn says that the 
monopoly is not what it was.
    My question of you is, to what extent do you believe that 
the Postal Service still has monopoly power over certain mail 
products? What does that say about decisions that we ought to 
make about retaining or changing the system for postal rate 
regulation? And I am going to ask, after you have responded, I 
am going to ask the Postmaster General to get involved in this 
and come back to Mr. Williams as well. Please.
    Ms. Goldway. I think it is a very important issue that you 
have raised.
    Chairman Carper. If you think about it, the PRC was not 
always the Postal Regulatory Commission. For many years, it was 
the Postal Rate Commission.
    Ms. Goldway. Right.
    Chairman Carper. They had a very different role than they 
have had in the last 6, 7 years.
    Ms. Goldway. And I think this matter can be discussed and 
debated by many people. What our staff has indicated is that 
there is still a strong monopoly when it comes to letter mail 
and those products that the Postal Service has a market-
dominant position in. If you are a non-profit organization and 
you want to communicate with a paper product, your option is 
only one and that is to go through the Postal Service. You do 
not have another option.
    So studies that determine what the price elasticity and 
inelasticity in the future will be, when we have been operating 
in a monopoly system for the last 100 years, are not 
necessarily reliable. And it seems to us that the Postal 
Service cannot have it both ways.
    It cannot say that this is a competitive market and if you 
let us have competition without any regulation, we will not 
raise prices more than we need because there is competition 
that will keep prices down. On the other hand saying, there is 
price inelasticity and it is OK if we raise prices because we 
will keep our volumes up because there is no concern about 
that. There is constant demand.
    You cannot present both arguments. So it seems to me, if 
you want to eliminate the monopoly and allow prices to 
fluctuate and get their sweet spot, as we have done with the 
competitive products that the Postal Service has done where 
they have raised prices over 5 percent a year, then you do 
that.
    But if you ask first-class mailers, if you ask people who 
send greeting cards, if you ask people who are non-profit 
mailers whether they can manage with a 5 percent price 
increase, you are going to get responses that say they simply 
cannot do it and that, in fact, you will lose so much volume 
that you will not get the revenue that the Postal Service 
thinks it is going to get from that mail.
    Further we believe in the Commission that the price cap 
regime has created the stability and transparency and 
accountability that has given mailers some assurance in a time 
of real transition, and has given the Nation's users the sense 
of trust in the mail, which is very important to the Postal 
Service brand and its future.
    Chairman Carper. I would welcome the thoughts of General 
Donahoe on this. Sort of the implicit question is, what is the 
role of the PRC going forward? It is not what it used to be. 
Maybe it is not what it is today, but what should it be? And I 
appreciate what you just said, Madam Chairman.
    Mr. Donahoe. You know where we stand. We put a white paper 
out on our role around Governors in general. The key for us 
from a Governor's perspective is this: If you are putting the 
responsibility on the Governors and management of the Postal 
Service to run the organization, we should also have the 
authority to make choices and changes on prices, service, and 
products, and do it with absolute speed.
    This world has gotten faster and faster. Every day that we 
look around, you think about the changes that have happened 
just in the telephone and computer industry, and we are in the 
same exact environment. Our feeling has been that we have a 
very reasonable and responsible Board of Governors. They will 
not make decisions that put the organization out of business. 
They will not make decisions that hurt the industry.
    We think that we should be in a situation as spelled out in 
your bill that has a lot of flexibility around a cap, 
potentially no cap at some point in time, and the ability to 
have after-the-fact review with the Commission. We have no 
argument that the Commission should be there to take a look at 
things--decisions that we make--like a public rate commission 
does today, and we would support that 100 percent.
    Ms. Goldway. Could I just----
    Chairman Carper. Madam Chairman, go ahead, and then we will 
go to Mr. Williams.
    Ms. Goldway. Because the Postal Service is a federally 
owned enterprise and is exempt from many of the State and 
Federal regulatory laws, the law governing the Postal Service 
includes in it a provision that there can be no refunds. The 
Postal Service is exempt from giving refunds. If it establishes 
rates that are determined to be in some way unlawful, given the 
various requirements that are still in the law that you 
propose, how does a complaint mechanism solve that problem, an 
after-the-fact complaint mechanism. It is a question. You may 
be satisfied with it, but it is a question that we hear from 
stakeholders.
    Chairman Carper. Dr. Coburn said that could easily be added 
to the bill and I appreciate the element. Let me go to Mr. 
Williams before my time runs out. And then we recognize Senator 
McCain. No, not just yet. One more minute.
    Mr. Williams. I think increasingly we find ourselves in a 
very fast, very unforgiving environment and we need tremendous 
agility. There are sudden threats and there are perishable 
opportunities. The Postal Service needs to be able to move in 
an agile manner to operate and navigate inside that environment 
or they will disappear, and if they cannot do it, they should 
disappear.
    There are a lot of alternatives to messaging of all sorts 
today. In advertising, there has been television, radio, 
newspaper, and now an aggressive Internet market. And personal 
communications, texts and tweets and wall posts have fabulous 
features to them. Bill payment companies are aggressively 
moving to cut back office costs by driving people to the 
Internet.
    In parcels, actually, we are the ones that are breaking the 
monopoly. The Postal Service got into parcels in order to break 
some of the mischief that was occurring between the parcel 
companies and the railroads. So I believe that efficient market 
forces should always be used when it is possible, and I believe 
in this environment, it is possible and it is the ingredient 
that is needed to move the Postal Service forward.
    Chairman Carper. Thank you. Senator McCain, welcome.

              OPENING STATEMENT OF SENATOR MCCAIN

    Senator McCain. Well, thank you, Mr. Chairman. I want to 
thank you and Senator Coburn for this product which, I think, 
is a very important one and an issue we have been wrestling 
with for a long time. The fact that you and Senator Coburn have 
come together to craft this language with compromise, I think, 
which Senator Coburn is very well known for is a model, as you 
know, of compromise here in the Senate.
    I do want to thank both of you for putting together this 
legislation which is urgently needed to remedy a very serious 
situation in a broad variety of ways. I thank you both for 
working this out and I look forward to supporting it in any way 
that I possibly can.
    Mr. Williams, you just made a very interesting comment. 
Five years ago, the whole means of communications in America 
was vastly different than it is today. I think you could argue 
that 5 or 10 years from now, it may be again very different 
from what it is today. And you made the argument, and I think 
it is valid, that we have to have an enormous amount of agility 
in order to keep up with these incredibly ever-changing methods 
of communication. Is that an argument, in your mind, to 
privatize the Postal Service?
    Mr. Williams. The United States is, so far to date, has 
picked a different route and it has been----
    Senator McCain. The Europeans have chosen a different 
route, right?
    Mr. Williams. They have in halting manner. They are sort of 
going forward as quickly as they can and they pause when they 
need to. In the United States, they have joined with the 
private sector in public/private partnerships and co-opetition 
which definitely--Senator McCaskill's comments were absolutely 
fascinating. So I am not sure what the road is ahead. 
Privatization or----
    Senator McCain. Then if you are not sure of the road ahead, 
do you have confidence in this legislation, that it can 
accommodate the road ahead?
    Mr. Williams. I do. I think it is a good piece of 
legislation. If I was worried about anything, and I am not 
worried sick, it would be that we do not quite have it balanced 
yet. We are still trying to match demand with supply. We still 
have a ways to go. The bill seems to want to pause that with 
regard to the closure of additional plants and post offices. 
That is the part I look at with some worry.
    I also see some value in it. It might be good to pause, but 
we are losing money, we are accumulating debt, all of our money 
for innovation is gone, we need to arrive as fast as we can at 
this balance and then return to normalcy.
    Senator McCain. Thank you. Mr. Donahoe, you have earned the 
praise of Senator Coburn for all the work you have done in 
helping craft this legislation with him and Senator Carper. I 
can assure you that is very hard to come by. So you should 
appreciate it. I want to thank you and I want to thank the 
panel for the work that they have done.
    But given the fact that 80 percent of the Postal Service 
costs are associated with labor, how important is language in 
this bill that would require the financial health of the Postal 
Service to be a consideration during arbitration of labor 
contracts?
    Mr. Donahoe. I think it is very important. I think the key 
for the Postal Service----
    Senator McCain. Very important and very controversial, 
right?
    Mr. Donahoe. It is controversial. There are a lot of things 
in the proposed bill, and things that we have put white papers 
out on that are very controversial but needed. When you look 
ahead in this Postal Service, the whole idea is long-term, 
comprehensive legislation and it cannot be halfway. So if we 
are going to address these issues, we have to address long-term 
costs like retirement costs, like some of the issues that we 
face today from a workforce environment.
    I think the key thing to keep in mind, from a labor 
perspective is this: If we deliver mail to every door 5 days 
per week and process mail through the system and deliver 
packages 7 days per week, we will have to have people to do 
that. So labor costs will always be large. The key thing is not 
so much the percentage of labor costs. It is shrinking the 
total cost of the organization and that is what we aim to do.
    We have made very good progress with the unions over the 
last couple of years with substantially higher rates of non-
career employees, which helps the bottom line. Good people come 
in, they get jobs, they are a lot more affordable. We need to 
continue that work to make our retirement systems more 
affordable. Next week we are going to talk about health care.
    There needs to be dramatic changes in the health care 
proposals for the Postal employees, which should apply to all 
Federal employees, to make it more affordable. That is the way 
we need to go. We need to be courageous and we need to be bold 
and we need to make this happen.
    Senator McCain. You made reference to the issue of 5-day 
mail delivery, and in your testimony, you said the American 
public overwhelmingly supports moving to a 5-day delivery. This 
legislation has a moratorium on that. Do you think that is just 
a matter of compromise or do you think that is a good idea or 
bad idea?
    Mr. Donahoe. I think it is a matter of compromise. I would 
love to be in a situation where next Memorial Day we move to a 
5-day schedule. It is the perfect time. Mail volume is down 
low. It is a good time for us to make the transition and it 
saves us $2 billion a year. The American public, in every 
survey that we have done, has been fully in support. I think 
the lowest percentage is 70 percent.
    We have some survey information that says 80 percent-plus 
of Americans think it is a good idea, versus closing post 
offices and raising prices.
    Senator McCain. For the record again, you believe that the 
Carper-Coburn bill gives you the flexibility that you need to 
achieve the billions in cost reductions that are necessary to 
sustain the Postal Service for the long term?
    Mr. Donahoe. It gives us the flexibility and the speed that 
we need. The one thing that is missing is the requirement to 
use Medicare as a primary for health care for retirees. We are 
going to talk about that next week. I will make a pitch that it 
has to be mandated. If not, we do not hit the financial numbers 
that we need to hit. Our business plan lays this out. If we 
follow what we need to do from a business plan perspective, we 
will get this organization back on good, firm financial 
footing.
    Senator McCain. And you agree with that, Ms. Goldway?
    Ms. Goldway. I certainly respect and admire and support the 
efforts that the Postmaster General has made with regard to 
cost-cutting. I think the levels of efficiency and savings are 
quite remarkable. But I do not and my Commission does not 
endorse all of the aspects of this particular law.
    Senator McCain. So would you submit for the record the 
areas that you do have concerns with?
    Ms. Goldway. Well, I think our testimony----
    Senator McCain. I know your testimony, but it is very 
helpful for us to have in writing your exact concerns. Would 
you do that?
    Ms. Goldway. I will be happy to do that.
    Senator McCain. Thank you very much.
    Ms. Goldway. Thank you for the opportunity.
    Senator McCain. Thank you very much. Thank you, Mr. 
Chairman.
    Chairman Carper. Those are great questions. Thanks so much, 
Senator McCain, for your support. In Arkansas, they always say, 
when they say hi to people, they say, Hey, man. So that is why 
I say to him every time I see him. Senator Pryor, you are 
recognized.

               OPENING STATEMENT OF SENATOR PRYOR

    Senator Pryor. Thank you, Mr. Chairman, and I want to thank 
you and Senator Coburn for your work on this.
    Ms. Goldway, let me start with you, if I may, on the Postal 
Service Advisory Opinion Process. I know there has been some 
questions about how long it takes and why it takes so long, but 
let me ask you about, from your standpoint, the value of 
providing a non-binding advisory opinion. What is the value in 
a non-binding opinion?
    Ms. Goldway. Well, I think we have had many examples 
brought out today. The Postmaster General talks about the fact 
that the Postal Service has decided to maintain post offices in 
rural America. They did that after coming to us with a proposal 
to close 3,600 rural post offices. And the discussion that we 
were able to provide and the open forum of the advisory opinion 
process and the recommendations we gave them suggested that 
they provide an alternative, adjusting hours, and that is what 
they have done.
    So I think that the point of these advisory opinions is to 
give the Postal Service a better opportunity to get an honest 
review of what their proposals would be to change, rather than 
barrel ahead with what their initial proposals are. The same 
could be said for the 6 to 5 day delivery. When we reviewed 
that and highlighted many of the problems that rural America 
would face with eliminating the sixth day, we talked about 
packages, particularly prescription drugs, and as a result, the 
Postal Service has adjusted what it now proposes to do with 
going to a 5-day delivery pattern.
    There are problems with the advisory opinion process. It 
can be lengthy. There is a lot of opportunity, we think, to 
streamline the processes, and the Commission has introduced 
rules to reduce the litigious nature of some of the processes 
so that we can make decisions in a more timely fashion. We hope 
to do that.
    But we do believe that the transparency and accountability 
of the Postal Service is maintained when you have this advisory 
opinion process included in the public policies of the 
government.
    Senator Pryor. From your standpoint, is there value in 
these advisory, non-binding advisory opinions?
    Mr. Donahoe. Yes. We take the advisory opinions very 
seriously. We also solicited our customers, to Chairman 
Goldway's point, with post offices. We spent some time in the 
field in a number of different places and people told us, Hey, 
if you can keep the post office open, if you can make it more 
affordable from changing the hours, we are OK with that, but 
please keep it open. And we balanced that with what we got 
back, too, from the Commission.
    Senator Pryor. Let me ask you a followup on one of Senator 
McCain's questions. He made a statement and I just want to know 
if it is accurate. He said that 80 percent of postal costs are 
associated with labor. Is that right?
    Mr. Donahoe. 78 percent.
    Senator Pryor. 78 percent of postal costs are related to 
labor?
    Mr. Donahoe. Yes.
    Senator Pryor. Is that anything in addition to just the 
hourly, the wages and the salaries and the benefits, et cetera? 
Is that what that is?
    Mr. Donahoe. It is salaries, benefits, as well as the 
amount of money that we put away for retirement and health 
care. Now, on top of that is the retiree health care pre-
funding. That represents about 5 percent. So if we resolve 
that, our percentage of employment costs in terms of total 
would be about 73 percent.
    Senator Pryor. And remind the Committee again about your 
numbers of employees. I know you have been shrinking your 
workforce. So let us say, 10 years ago, 5 years ago versus 
today, how much have you shrunk your workforce?
    Mr. Donahoe. High point of employment in the years late 
1999, 2000, we had 804,000 careers employees with about 100,000 
non-career. Today we have 490,000 career employees with 120,000 
non-career. So there has been about 308,000 reduction in total 
career employment.
    Senator Pryor. What is that, about a 35, 40 percent 
reduction?
    Mr. Donahoe. It is almost 40 percent, yes.
    Senator Pryor. And also, while I am thinking about a 
followup, let me ask about some cost savings. I know over the 
years, we on this Committee and in other contexts here in the 
Senate, we have talked about the possibility of you guys going 
to natural gas vehicles. Do you all have an initiative on that?
    Mr. Donahoe. Yes, we do. We are working with the--we are 
working with the Star Ride Association as we speak. They have 
put together a very good group of about five large truck 
company owners and they are working with our people to explore 
ways that we can move into using natural gas, especially for 
the long haul fleets. What we have to figure out is how to make 
that a win-win, and we would like to be able to compensate 
these companies for making these investments, at the same time 
share some of the savings.
    In fact, we have even reached out to the Department of 
Energy. We think this would be a good project for some 
investment, rather than some of the others that have been made, 
because there are definitely opportunities to get some payback 
on this.
    Senator Pryor. And do you think you will save money by 
doing that?
    Mr. Donahoe. We think we will save money and we think the 
Star Ride Association will save money, and we think it is a 
good thing for the environment.
    Senator Pryor. And let me ask you, Ms. Goldway, if I can, 
you mentioned in your testimony that a, quote, sizable portion 
of the U.S. population still depends on the mail to help manage 
their lives and communicate with businesses, governments, and 
social institutions. Would you tell us more about that sizable 
portion of people and kind of what you mean and how they are 
going to be affected by some of these changes?
    Ms. Goldway. There are many people, especially in rural 
areas, but, in fact, throughout the country who are not 
connected to the Internet at all. And while we talk about the 
dramatic changes that are taking place, as much as a third of 
the country is either not connected or not connected at a 
strength of broadband that would enable them to have the kind 
of interactive products and communications that we talk about.
    And yet, our government is committed to providing universal 
service of communication to everyone. So we need to have a 
Postal Service that does that. Furthermore, as long as we do 
not have a national identification system and we rely on where 
you live to identify you, the Postal Service is the address 
master for the country.
    And the Postal Service really needs to be maintained in 
order for people to vote, for their children to be enrolled in 
schools, for all ranges of emergency services. It is a vital 
network. And when we talk about balancing the needs of the 
public and businesses, we have to keep that in mind.
    And it is difficult. It is not an easy situation when we 
know, as other Senators have pointed out, that it is more 
expensive to provide service in the rural communities. But it 
is something that has to be planned for and has to be watched 
over. And we believe that some sort of regulatory oversight 
that assures that protection is necessary in whatever 
legislation is developed to give the Postal Service the 
additional financial support that it needs.
    Senator Pryor. Thank you.
    Ms. Goldway. Thank you for that opportunity.
    Senator Pryor. Thank you, Mr. Chairman.
    Chairman Carper. Thank you, Senator Pryor. Senator Coburn, 
anything else you want to say before this panel leaves?
    Senator Coburn. I will have some questions for the record.
    Chairman Carper. Before you all leave, again, thanks very 
much. Excellent testimony, very thoughtful testimony. I thought 
a real good discussion of some mighty important issues. Mr. 
Williams, you always bring a lot to the field, like they say in 
sports, not leaving anything on the playing field. So we have a 
lot of good ideas out there and I thought this was a hopeful 
conversation, and I am looking forward to our next panel of 
witnesses.
    I just want to say, we probably do not say this enough and 
I want to say it. When folks look at the service they get from 
the Federal Government, in some cases they are pretty happy, in 
some cases not as happy. We can always do everything better. 
The Postal Service can do everything better as well.
    But we need to keep in mind, of all the services, 
government-related services--and this is not an entirely purely 
government operation we know, but folks in this country still 
have a very high regard for the Postal Service. I think over 
the last 7 or so years, still No. 1 compared to the rest of the 
services that we provide. That is pretty good.
    We can do better and I want to make sure that we do better, 
especially when people go into a post office around the country 
for service, that they get friendly service, they get prompt 
service and they get friendly service. For me that is 
important. I know it is for our Chairman, Chairman Goldway. I 
would just ask that you keep that in mind.
    The other thing I want to say to any of the folks around 
the country who work for the Postal Service or retired from the 
Postal Service, I just want to say we appreciate your service. 
We appreciate what you do for all of us. We want to make sure 
that you and your descendants will be around for a long time to 
continue to provide that service and we will be around for a 
long time to enjoy seeing you get better. Thanks so much.
    Mr. Donahoe. Thank you.
    Mr. Williams. Thank you, Mr. Chairman.
    Chairman Carper. With that, I would like our second panel 
of witnesses to come forward, please. All right, everybody. I 
would ask you to calm it down. We have this panel. We want to 
hear them. I would ask you to take your conversations out into 
the hallway, if you would, please. These folks deserve our 
respect, they certainly have our thanks.
    I will just briefly introduce our witnesses. I want to 
start off by introducing Cliff Guffey. Cliff, very nice to see 
you. He serves as President of the American Postal Workers 
Union (APWU) since 2010. Tough leader, tough negotiator, but 
also a very fair-minded person who cares deeply about the 
Postal Service.
    I would say the same thing about Jeanette Dwyer. Great to 
see you. Always welcome the chance to meet with you. President 
of the National Rural Letter Carriers Association (NRLCA), I 
think since 2011.
    The next witness, Mr. Beeder, Mr. John Beeder serves as 
President and Chief Operating Officer (COO) of the American 
Greetings Corporation and has served in various executive roles 
in the greeting card industry for 30 years, starting as a 
child, I bet. Welcome, aboard.
    And next we have Jerry Cerasale--is that right? It is not 
right, is it?
    Mr. Cerasale. Cerasale.
    Chairman Carper. Cerasale, OK. I am sorry. It is a tough 
one. Mr. Cerasale has served as Senior Vice President, 
Government Affairs at Direct Marketing Association since 1995. 
Mr. Cerasale, great to see you.
    And finally, Seth Weisberg. Seth is currently the Chief 
Legal Officer for Stamps.com, and has worked in various 
capacities for the company since 1998. Mr. Weisberg, happy to 
see you all. We are going to ask you to take about 5 minutes to 
give us your testimony. If you go way beyond that, I will have 
to rein you in, but if you could stay in that neighborhood that 
would be great. We will start off with Cliff Guffey. Mr. 
President, welcome.

   TESTIMONY OF CLIFF GUFFEY,\1\ PRESIDENT, AMERICAN POSTAL 
                         WORKERS UNION

    Mr. Guffey. Thank you, sir. Dr. Coburn.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Guffey appears in the Appendix on 
page 93.
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    Senator Coburn. Welcome, being a fellow Oklahoman.
    Mr. Guffey. Good morning, Chairman Carper and Members of 
the Committee, thank you for this opportunity to testify on 
behalf of the APWU about maintaining postal services, reducing 
costs, and increasing revenue. No discussion of reducing postal 
service costs can occur without a discussion of the requirement 
of pre-funding of retiree health benefits.
    As I have said elsewhere, S. 1486, as it stands now, is 
fatally flawed and we oppose it as written. It fails to correct 
what was the cause of the Postal Service's financial crisis, 
the mandate in the Postal Accountability and Enhancement Act of 
2006, that the Postal Service pre-fund retiree health benefits.
    Because of that requirement, there has been a lot of ill-
considered and destructive cost-cutting by the Postal Service. 
These sorts of cost-cutting efforts must be stopped. They are 
penalizing the workers, men and women, of the United States 
Postal Service by threatening their jobs and undermining their 
benefits.
    They are cutting services to the American people and 
instead of protecting Postal Service from impending financial 
disaster, they are dismantling our Nation's postal services. To 
our utter dismay, S. 1486, as written, would permit cost-
cutting from health benefits and retirement benefits. It would 
remove the cornerstone of the 1970 law that created the Postal 
Service by making it possible for the Postal Service to attack 
our retirement and health benefits.
    Those benefits are part of the Federal law that created the 
Postal Service. By permitting the Postal Service to cut costs 
by attacking those benefits, Congress would be undermining the 
ability of postal workers to live in security and dignity, both 
as active workers and after they retire.
    We vehemently oppose any changes that would interfere with 
the right of the postal employees and retirees to continue to 
participate in the Federal Employees Health Benefits Program 
(FEHBP) and Federal retirement programs. While the Postal 
Service claims that it can lower health care costs, that is not 
true. What the Postal Service seeks to do is shift costs from 
itself to employees, to retirees and Medicare. This is not 
acceptable.
    It is a desperate and ill-considered attempt to deal 
indirectly with what should be dealt with directly, the retiree 
health benefits pre-funding requirement. Because of the pre-
funding requirement, the Postal Service has cut costs in ways 
that have created hardships for postal workers and threatened 
to destroy the Postal Service. The Postal Service has closed 
mail processing facilities, closed post offices, lowered its 
service standards, and reduced hours at post offices, 
particularly in rural and small communities.
    The Postal Service has cut its mail processing network so 
deeply and so recklessly that it is now violating standards 
mandated by law, standards that the Senate sought to protect 
when it approved S. 1789 last year. Network consolidation is 
delaying first-class mail and periodicals by 2 or 3 days in 
many places. We urge this Committee, the Senate, and the 
Congress to insist that the service standards be maintained.
    Likewise, retail services and services to rural areas have 
been cut and are still at risk. Retail services and rural post 
offices must be preserved and protected. In addition, it is 
past time for the Federal Government to stop holding onto 
excess Postal Service funds that have been deposited in Federal 
retirement programs.
    Postal rate payers have, for many years, been subsidizing 
the Federal Government through substantial overpayments into 
Federal accounts. This has always been unfair to the rate 
payers, but now it is more than unfair. It is unsustainable. To 
correct this, postal retirement obligations must be 
recalculated on the basis of postal employee demographics and 
all over-funding in Federal retirement accounts must be repaid 
to the Postal Service without restriction.
    We think Title V of S. 1486, which would cut benefits for 
injured employees throughout the Federal Government, is an 
example of how postal cost-cutting threatens to penalize postal 
employees. It is wrong, we oppose it, and it should be removed 
from this bill and dealt with elsewhere.
    As the Chairman and this Committee have recognized, it is 
necessary to repeal the restriction on the Postal Service 
providing non-postal services. There are many ways in which the 
Postal Service can use its mail processing, retail, 
transportation, and digital networks to provide useful and new 
services that will enhance the Postal Service's performance, 
aid our communities and small businesses, and to help sustain 
the Postal Service.
    We appreciate the fact that Chairman Carper and Ranking 
Member Dr. Coburn have addressed the issue of postal revenues 
and a CPI cap on rates. We believe the CPI cap is 
unsustainable. To preserve universal service, a better balance 
must be found between rates and service. APWU members have 
borne the brunt of the drastic changes made by the Postal 
Service in the past 7 years.
    Our members have been penalized unfairly for financial 
problems they did not create and could not control. The APWU 
cannot accept efforts to impose further sacrifice on postal 
employees. Thank you and I am available for questions.
    Chairman Carper. Mr. Guffey, thank you for your testimony 
very much. We look forward to asking some questions. Ms. Dwyer, 
welcome, nice to see you.

 TESTIMONY OF JEANETTE P. DWYER,\1\ PRESIDENT, NATIONAL RURAL 
                  LETTER CARRIERS' ASSOCIATION

    Ms. Dwyer. Good morning, Chairman Carper and Members of the 
Committee. I appreciate this opportunity to testify on behalf 
of the NRLCA. The NRLCA and its members care deeply for the 
Postal Service and the service that it provides to Americans. 
But we have significant concerns about the damage that the 
pending Senate Postal Reform legislation will do to that 
service.
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    \1\ The prepared statement of Ms. Dwyer appears in the Appendix on 
page 130.
---------------------------------------------------------------------------
    We have shared these concerns in our written testimony, but 
I would like to use my time today to focus on service. Make no 
mistake. If the Postal Service is to remain viable and 
competitive, we need to keep the ``service'' in Postal Service. 
This means continuing to utilize its trained and dedicated 
Federal workforce to provide 6-day mail delivery, keeping 
sufficient post offices and processing facilities open, and 
maintaining current service standards.
    The Postal Service must also continue to take advantage of 
and strengthen its unique ability to perform services such as 
delivering the ``last mile''. Although the Postal Service is 
undoubtedly faced with financial challenges, these issues are 
not primarily the result of its business practices. It is no 
secret that the most significant restraint on its success 
remains the congressionally mandated pre-funding of retiree 
health benefits.
    The Postal Service would have shown a $660 million profit 
in the third quarter of fiscal year 2013 had the retiree health 
benefits pre-funding burden been excluded. Thus far in 2013, it 
would have made a $330 million profit excluding the pre-funding 
payment. This is a remarkable achievement considering the 
Nation's sluggish recovery from the largest economic downturn 
since the Great Depression.
    It demonstrates the Postal Service's ability to turn a 
profit while building upon its current business model and 
continuing to provide universal service. But S. 1486 would 
disrupt this success. It would slash service, cut delivery 
days, close post offices and postal facilities, disrupt 
collective bargaining, and reduce employee benefits, all 
because of a pre-funding schedule that represents roughly 80 
percent of the Postal Service's total losses over the past 6 
years.
    These changes will drive more and more people away from 
using what is consistently ranked the most trusted government 
agency, and will eventually lead to the Postal Service's 
demise. We have already seen the negative impact of these cuts 
and reductions. Prior service changes and plant consolidations 
have slowed down processing and delivery times across the 
country.
    Numerous accounts are coming in from rural letter carriers 
that mail is coming to them late in the day. This means late 
delivery to customers, often after dark, inconveniencing 
customers awaiting parcels, medications, and other important 
items.
    Meanwhile, mail that carriers collect on the route is often 
sitting overnight before being processed because many post 
offices have imposed earlier dispatch times, meaning that mail 
collected on the route does not come back in time to be sent to 
the plant.
    Shipping and package delivery revenue continues to increase 
dramatically as a result of a rapidly increasing e-commerce 
sector, which is helping to mitigate the negative impact of 
online communication and bill pay. But further cuts will 
continue to chip away at the Postal Service's ability to 
efficiently handle the mail and package volume coming through 
this system.
    The NRLCA strongly believes that S. 1486 would cause the 
Postal Service to abandon those Americans who most depend upon 
the regular delivery of the mail. Rural America, in particular 
will suffer extreme hardship if our customers and small 
businesses lose a day to send and receive mail.
    The livelihoods, and often health and well-being of entire 
communities depend on the Postal Service to facilitate 
communication and deliver goods. In many parts of rural 
America, there are simply no alternatives. In the past, the 
Postal Service and its rural letter carriers have always been 
there for them. I am here today because I want rural carriers 
to continue to be able to provide high quality service to their 
customers.
    Mr. Chairman and Members of the Committee, we have the 
potential to succeed if only Congress would address the unfair 
pre-funding mandate and allow the Postal Service to focus on 
growing the business, not shrinking it by reducing delivery 
service. By doing so, you will give the Postal Service a 
fighting chance to remain viable without taking drastic 
measures that will only harm this great institution. The 
Americans who rely upon it, and the employees, such as rural 
letter carriers, who serve it with determination, integrity, 
and pride.
    Thank you for allowing me to submit testimony and I would 
be happy to answer any questions.
    Chairman Carper. Great. Madam President, thank you so much. 
Thanks for the testimony and for being here with us today. Mr. 
Beeder, great to see you. Please proceed.

  TESTIMONY OF JOHN BEEDER,\1\ PRESIDENT AND CHIEF OPERATING 
                  OFFICER, AMERICAN GREETINGS

    Mr. Beeder. Thank you, Senator Carper, Senator Coburn. I am 
speaking here today on behalf of the Greeting Card Association 
(GCA), which represents more than 150 publishers of greeting 
cards and related social stationery products throughout the 
United States. We are grateful for the opportunity to 
participate in today's hearing.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Beeder appears in the Appendix on 
page 136.
---------------------------------------------------------------------------
    S. 1486 contains many desirable reforms and initiatives. We 
are pleased to see the two common sense recommendations. A 
shift to more cost-effective modes of delivery and a realistic 
treatment of retiree health benefit funding are prominent 
features of S. 1486.
    However, the ratemaking provision of S. 1486 is a matter of 
grave concern. Section 301 should be stricken and the current 
PAEA ratemaking provisions left in place. The Postal Service's 
financial problems are not due to the ratemaking system. The 
Postal Service today has a cost problem, not a ratemaking or a 
revenue problem.
    The unworkable PAEA retiree health care pre-funding 
schedule, appropriately redesigned as in Section 103 of the 
bill, cures a large part of the Service's current deficit. 
Thus, there is no reason to encourage it to drive away 
customers and reduce its own revenue by eviscerating the 
ratemaking system as S. 1486 would do.
    Doing away with PAEA's relatively liberal price cap 
incentive to efficiency after 2016 makes no sense, especially 
in the context of other important features of S. 1486. With 
neither a close tie between rates and costs nor an exogenous 
price cap limiting increases there would be nothing in the 
statute to forestall resorting to regular rate hikes above the 
CPI as a way of avoiding the unavoidable.
    S. 1486 would weaken existing controls unnecessarily. Today 
there is an independent evaluation by the PRC of whether each 
new set of rates conforms to the price cap. Handing this 
function over to the same Board of Governors, which directed 
the filing of the rates in the first place, would put the Board 
in the untenable position of independently verifying its own 
actions.
    Another serious flaw in the bill is treatment of exigency 
rate cases where at least four legal standards must be met. 
These have the potential to be controversial. The evaluator 
must find, one, that exceptional or extraordinary circumstances 
are present; and then that the increase is, two, reasonable; 
three, equitable; and four, necessary under the best practices 
of honest, efficient, and economical management.
    S. 1486 would have the Board of Governors decide these four 
difficult questions. This is a conflict of functions and would 
allow the Postal Service to effectively act as an unregulated 
monopolist. These problems cannot be solved by allowing rate 
decisions to be reviewed by the PRC on complaint. Injured 
mailers, who have the burden of proof, would be hard-pressed to 
meet the considerable expense of proving such a case. The Board 
of Governors would decide rate questions with apparently no 
obligation to describe or disclose all the data and assumptions 
upon which they relied.
    Moreover, during the complaint process, the complainants 
would be paying questionable and, perhaps, provably unjustified 
rates. We could realistically expect potential complainants 
would simply switch more of their communication to alternative 
carriers or to the electronic media.
    Another ill-advised feature of the bill is Section 206 
which does away with the PRC's advisory opinion role in 
connection with significant nationwide service changes. First, 
abolishing any independent, pre-implementation review would be 
a serious loss of users of the mail and the Congress itself.
    The PRC's advisory opinions have provided a well-informed, 
objective view of these changes, some of which are fundamental 
definitions of the level and quality of service that should be 
of concern to Congress. Section 206 appears to contemplate rate 
and classification changes along with or as part of a service 
change. This could make estimation of the combined effects 
almost unmanageable.
    The GCA is also disappointed that S. 1486 seriously weakens 
the sensible compromise reached in the 112th Congress on 
reducing delivery days. Section 207 of S. 1789 appropriately 
required a 2-year waiting period and a determination, subject 
to review by the Government Accountability Office (GAO) and the 
PRC, that other prescribed cost-savings measures did not 
obviate the need to cut service in order to achieve long-term 
solvency. These necessary safeguards are diluted or omitted 
altogether in S. 1486.
    To summarize, Sections 301 and 206 should be stricken from 
the bill to restore the bill's focus on creating a streamlined, 
cost efficient, capable Postal Service to meet today's needs. 
Encouraging an approach to financial problems that would 
facilitate potentially large rate increases and service cuts, 
cuts needlessly and undermines the beneficial features of the 
bill. And eliminating independent review of important decisions 
is not in the interest of mail users, the Congress, or in the 
long run, the Postal Service itself. Thank you.
    Chairman Carper. Mr. Beeder, thank you so much. Mr. 
Cerasale, please proceed.

    TESTIMONY OF JERRY CERASALE,\1\ SENIOR VICE PRESIDENT, 
     GOVERNMENT AFFAIRS, DIRECT MARKETING ASSOCIATION, INC.

    Mr. Cerasale. Thank you very much. Good afternoon, Senator 
Carper, Senator Coburn, it is a pleasure to be here and I am 
here representing a united mailing industry, including the 
Affordable Mail Alliance, the Coalition for a 21st Century 
Postal Service, all major customer trade associations, paper, 
printing, and mailing technology industries. Together it is a 
$1.3 trillion industry that employs nearly eight million 
private sector workers and constitutes some 9 percent of gross 
domestic product (GDP).
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Cerasale appears in the Appendix 
on page 201.
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    It is those businesses, non-profits, and other mailers 
whose decisions to purchase postage pays the bills of the 
Postal Service. They account for approximately 80 percent of 
mail volume and contribute 90 percent of the revenue of the 
Postal Service. Yet, that industry has lost since 2007 over one 
million jobs and many more are still at stake.
    So we are very pleased to be invited here today to testify 
before you. We are encouraged that you remain invested in 
postal reform. We appreciate your leadership on this vital 
matter. My written testimony contains our positions, and often 
our support, on many of the provisions in your bill, S. 1486, 
and I ask that the testimony be admitted in the record.
    This afternoon, I do want to focus on one major area, 
postal rates. S. 1486 would grant the Board of Governors of the 
Postal Service unilateral pricing authority for the mail over 
which it has both the statutory monopoly for delivery and a 
monopoly over the mail receptacle. There would be no price cap 
and there would be a weakened Regulatory Commission that would 
have after-the-fact complaint review with no authority to set 
postage rates and no authority to require refunds. What 
monopolist would not want such power?
    And although the monopoly is weaker than it has been, it 
still exists, and even if it were eliminated, the Postal 
Service would still maintain market power over the delivery of 
paper letters. We oppose that expansion of monopoly power. We 
do not think it is good for the economy, for our industry 
consistent with our system of checks and balances, and in the 
long run, we do not think it is good for the United States 
Postal Service.
    Elimination of the price cap, a cap which the PRC today 
said has been successful in reining in costs of the Postal 
Service, would reintroduce uncertainty and unpredictability in 
rate setting and drive out mail from the mail system at a 
faster pace. We hear that all the time from executives of our 
companies.
    We also have heard today that mail volume is price 
inelastic. Any mail volume lost would be more than compensated 
by an increase in postage revenue. We disagree with that, 
particularly when postage increases are more than the rate of 
inflation. Inspector General Williams has said that his price 
elasticity study was limited to small changes in price, not 
inflation busting increases.
    The last time market dominant postage rates were greater 
than the rate of inflation was May 2007. I am going to use the 
example of catalogs. Catalogs received a double digit postage 
increase in May 2007 and in the next year, volume for those 
catalogs dropped 23 percent. And most of that volume was the 
loss of prospecting mail, looking for new customers, and the 
investment which is the investment in the mail future.
    During that time of 23 percent volume drop, standard mail 
increased--volume rose. However, if catalogs were inelastic, 
even with a 23 percent volume collapse, postal revenues should 
have increased. It did not. Revenue dropped 11 percent. The 
catalogs were not price inelastic.
    Now, the Postal Service has relied on similar studies when 
it invested in flat shape sorting equipment to bring down the 
cost of sorting mail, which we agree with. Unfortunately, the 
23 percent drop in mail volume resulted in too little flat-
shaped mail to make running those machines efficient.
    We are paying for that mistake. The mistake is one of the 
primary reasons the flat-shaped mail is currently, quote, 
underwater, close quote. We urge you not to make decisions 
based upon studies that do not apply, or we think do not apply, 
to inflation--above inflation postage increases. Please do not 
eliminate the cap.
    We ask you also to include the compromise in the Postal 
Reform bill that the Senate passed last Congress to study the 
effects of excess capacity on flat-shaped mailing costs before 
requiring any postage changes. Many of the provisions of S. 
1486 will alleviate the financial pressure on the Postal 
Service. Allow those to work before enabling above-CPI postage 
increases.
    Mail is not price inelastic with above-inflation postage 
increases, and the Postal Service will suffer in the long run. 
We pledge to work with you to find solutions in the Postal 
Service financial status that do not drive customers away from 
the mail. Thank you very much for the time and I look forward 
to your questions.
    Chairman Carper. You bet. Thanks, Mr. Cerasale. Mr. 
Weisberg.

 TESTIMONY OF SETH WEISBERG,\1\ CHIEF LEGAL OFFICER, STAMPS.COM

    Mr. Weisberg. Thank you very much for inviting me to speak 
today. I am here on behalf of Stamps.com, the leading PC 
postage company. PC postage is Internet-based computer software 
that allows customers to print their own postage using their 
existing computer and printer. Our software has been developed 
to provide a full suite of modern, cutting edge tools to 
mailers and shippers. We provide continuous product 
improvements and high touch customer support all at negligible 
cost to the Postal Service.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Weisberg appears in the Appendix 
on page 211.
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    Customer adoption of PC postage has grown rapidly since it 
was introduced and has brought in new mail volume that would 
otherwise have gone to postal competitors. Just 6 years ago, PC 
postage accounted for roughly $250 million in annual postage 
sales. In 2012, Stamps.com, and Endicia together, accounted for 
over $2.85 billion in postage sold.
    Stamps.com postage growth alone was more than 70 percent 
year over year in 2012. That is right, growth even through the 
heart of the recession. The substantial majority of postage 
purchased through PC postage is used on Priority Mail and 
Express Mail products, the classes of mail that provide USPS 
with its highest level of contribution above direct costs.
    Virtually all the Priority and Express growth surge in 
recent years is generated through the PC postage industry 
channel. A recent Postal Service study showed revenue through 
the PC postage channel costs two cents per $1 of revenue, 
compared to 47 cents per $1 of revenue through a USPS-owned 
retail outlet.
    Our technology includes batch capability that allows users 
to print a large volume of shipping labels all at once, 
database integration technology for seamless, automatic import 
and export of information to and from a customer's internal 
order database, and direct integration with e-commerce 
platforms.
    An e-commerce merchant with multiple stores can consolidate 
all of their orders so they can ship them out with ease. With 
one click, they can directly import all of their order data 
from the most popular online marketplaces, including eBay, 
Amazon.com, Yahoo!, PayPal, Google Checkout, and Etsy, plus the 
most popular shopping cart software. When they are ready to 
ship, they can just select the orders and print their shipping 
labels.
    All the shipping data, including USPS tracking, will 
automatically post back to their web stores. They can also 
automatically order a carrier pick-up, send an electronic 
manifest to the Postal Service, and generate a scan form so all 
the carrier has to do is scan the form once and all of the 
packages are automatically in the Postal Service's computer 
systems.
    We believe that public/private partnerships are the best 
path forward for the Postal Service as technology innovation 
becomes increasingly important for its future. The Postal 
Service's e-commerce shipping business has been on fire because 
of a deeply successful public/private partnership set up over a 
decade ago.
    The existence of the PC postage industry is based on a 
partnership between the Postal Service and private industry 
that was forged in 1995 when the Postal Service intelligently 
decided that the extremely challenging technology issues that 
need to be solved to allow a standard PC to print U.S. legal 
tender in a secure and convenient method were best solved by 
private industry.
    Public/private partnership in the PC postage industry takes 
the form of the Postal Service regulating industry participants 
to make sure they are secure and work well technically with the 
Postal Service's systems. The Postal Service also partners with 
the industry to achieve mutual win-win goals of improving the 
customer experience, increasing revenue, and minimizing costs.
    Pat Donahoe and so many of the dedicated postal veterans 
who have ably worked with us for many years deserve much credit 
for the success story that is the partnership between the 
Postal Service and the PC postage industry. Thank you.
    Chairman Carper. Dr. Coburn has another engagement he needs 
to get to. I am just going to say one quick thing and then I 
will just turn over the questioning to him and then I will wrap 
it up. Mr. Cerasale, in your comments, you mentioned the rate 
hike, I think you said it was April 2007, and then we saw like 
a year later the drop of, I think you said, 23 percent in mail 
volume for at least one particular product.
    My recollection was the worst recession since the Great 
Depression actually began in 2007 and we sort of hit the 
bottom, like at the bottom of the cliff, sometime in late 2008. 
So I just would have us keep that in mind. You do not have to 
say anything. Now let me yield to Dr. Coburn. We will continue 
that conversation. Thank you. Senator Coburn.
    Senator Coburn. I want to ask Mr. Cerasale, you said your 
industry represents 9 percent of the GDP in this country? That 
was your testimony?
    Mr. Cerasale. $1.3 trillion worth of--yes, it is about 9 
percent of the GDP.
    Senator Coburn. Well, that is not just your industry. That 
is the side effects coming off of your industry.
    Mr. Cerasale. Yes. The entire mail community industry.
    Senator Coburn. The entire mail community industry 
represents $1.3 trillion?
    Mr. Cerasale. Yes.
    Senator Coburn. I would like very much for you to supply 
the back-up of that data to this Committee.
    Mr. Cerasale. I will.
    Senator Coburn. That means it is the second largest 
component of our whole economy.
    Mr. Cerasale. I will do that, yes, Senator.
    Senator Coburn. I doubt seriously that is factual. We have 
had some criticism, Mr. Cerasale, on the IG's study, and in 
your statement, you say it is unacceptable to give more pricing 
authority to the Board. But that would tend to contradict your 
position in PRC Order 154-1, which I will put your letter\1\ to 
the Postal Regulatory Commission in the record.
---------------------------------------------------------------------------
    \1\ The letter to the Postal Regulatory Commission appears in the 
Appendix on page 233.
---------------------------------------------------------------------------
    Chairman Carper. Without objection.
    Senator Coburn. Where it says, you do not believe the 
Commission has the authority to require further adjustment in 
this proceeding. So my question is this, do you trust the PRC 
more than the Postal Service when it comes to pricing standard 
flats?
    Mr. Cerasale. The Postal Service has a monopoly and there 
needs to be someone to overlook it.
    Senator Coburn. So here is my question to you on that. Do 
you think that a Board of Governors of the Post Office is going 
to give a price that is going to cause them a 23 percent loss 
in volume in the first year of a recession?
    Mr. Cerasale. Well, it was the first year of the recession, 
but standard mail rose during that year.
    Senator Coburn. I understand that. I mean, it is prudent. 
Any of your businesses that you represent, are they going to do 
that? They are not going to do that.
    Mr. Cerasale. My businesses would not do that with a 
product that they could not sell with volume dropping. They 
would most likely reduce prices to try and increase sales and 
volume and not raise prices whatsoever.
    Senator Coburn. And so right now, your industry, in terms 
of the Post Office, what is the net difference in revenues 
versus cost of delivery of your products today?
    Mr. Cerasale. Well, if you look at the----
    Senator Coburn. Today. I mean, this last year.
    Mr. Cerasale. Yes, I understand. The Postal Service has 
lost, I think it is a $6 billion loss, so I think if you look 
at--and my industry produces--pays for all the mail, that is 
it. Part of that cost, of course, is the retiree health benefit 
pre-funded. They are----
    Senator Coburn. I am actually trying to get to your 
industry and what the revenue is the Postal Service gets off of 
your industry versus what it costs to deliver your mail.
    Mr. Cerasale. Right.
    Senator Coburn. And I think that number is in excess of 
$500 million last year, was the difference between the cost of 
delivering your product and the revenue that came from that, 
and I would be happy to share that with you.
    Mr. Cerasale. Sure. I was trying to answer in terms of all 
the mail, which is what--we produce 90 percent of the revenue, 
80 percent of the volume. So it virtually looks at the--you 
would have to say that in large part, it is the financial 
bottom line of the Postal Service. That is the differential.
    Senator Coburn. All the more reason----
    Mr. Cerasale. That is 90 percent of the volume and that 
includes--that cost includes what the Postal Service will be 
defaulting.
    Senator Coburn. All the more reason. If you are that 
integral of a part of the revenue of the Postal Service, would 
not cogent members of the Board be very slow to cause something 
that would lose them significant volume?
    Mr. Cerasale. They should be.
    Senator Coburn. Well, do you think they would not be?
    Mr. Cerasale. Our businesses, people that we talk to in our 
industry, would try to look to lower prices to get more volume. 
That is what they would do if there is a volume--a sales 
problem. And that is not what the Board of Governors is looking 
to do.
    Senator Coburn. Well, but what they are--I guess the point 
I am trying to make is, right now, the cost to have your 
business is a half-a-billion dollar loss----
    Mr. Cerasale. OK.
    Senator Coburn [continuing]. In the Post Office. So the 
question is, are there not smart people that can say, where is 
the best cost benefit ratio for the Post Office in terms of 
your industry? And are you saying you do not think those people 
are available to make those decisions?
    Mr. Cerasale. I think there are people available to make 
that decision, but I would not put it in the hands of the 
monopolists totally. As I said in my written and in the oral 
statements, we have an excess capacity issue that the Postal 
Service based on numbers that have been produced and purchased 
the flat sorting equipment system that is not utilized because 
the volume went away. The volume went away on a pricing 
decision.
    So we think that eliminating that kind of excess capacity--
and the Postal Service has done an excellent job eliminating 
capacity, but we have seen drops in first-class mail volume 
long before 2007, and some of those changes should have been 
occurring sooner.
    Senator Coburn. But if you look at their employment, they 
had a shrinkage of 100,000 employees before the caps were ever 
put in.
    Mr. Cerasale. Yes.
    Senator Coburn. So they recognized that problem. It was not 
that they did not recognize it. Let me move on, I think, if I 
can. In your statement, you say in today's competitive world, 
the market will be determinative regarding postage rates. That 
is exactly what our bill is trying to do, is let the market be 
determinative.
    And I understand. If I was sitting where you are, I would 
say, no, I want a second shot at this every time. And I do not 
disagree. I am a private sector guy. I understand that. But 
there has to be a balance. We cannot continue to subsidize the 
flat business at a half billion dollars a year and then tell 
the people who are working for the Post Office, oh, by the way.
    And so, the question is, is there is a balance there? There 
has to be a balance. And what Senator Carper and I are trying 
to do is to create the environment where all those factors are 
taken into consideration as you make those decisions. And the 
way the Postal Regulatory Commission is set up is, you are 
going to second-guess it a lot. And then if you do not agree, 
you can sue them.
    So we are trying to change that to where market forces 
really are determinative. And it may just be that they lower 
the price so flats will come back based on what their market 
analysis says.
    Mr. Cerasale. I am not here just representing flats. I used 
the catalogs only as an example. I am representing all shapes 
and sizes and so forth.
    Senator Coburn. I understand that.
    Mr. Cerasale. But we agree that market forces should help 
determine what prices are asked, but you do have a statutory 
monopoly and it is there, it exists, and it is a monopoly not 
just on the delivery of letter mail, but a monopoly on the mail 
receptacle as well. That also has some significant market power 
that the Board of Governors would have control over in setting 
rates, and that is the problem that we face.
    And I do not have an exact solution for it. I know that 
eliminating the cap, after-the-fact review, no refunds, and 
think about it. How would we even do refunds?
    Senator Coburn. Well, we have already testified. There are 
ways to do refunds on the large customers. There is no question 
about that. Let me make one other point with you. We are going 
to have a postal system and what we know is we have to make it 
viable. We have to make the numbers work. And we cannot do all 
of that on the backs of the people who work for the postal 
system. It cannot happen.
    But here is what is going to happen if we do not get this 
right and we do not use market forces. You are not going to use 
the Postal Service.
    Mr. Cerasale. That is right.
    Senator Coburn. You are going to go and build warehouses 
and packaging where you are putting all the catalogs and 
mailers in a parcel box and then you are going to come back and 
use the Postal Service. So you are going to get your product 
out there, whatever the market determinative way says.
    And what Senator Carper and I are trying to do is balance 
both the pricing and the cost and give the flexibility so that 
the decisions can be made in real time, because it is acute. 
They are at their limit on borrowing. We are going to try to 
make all the changes that we can in terms of pre-paid health 
care. We are trying to make the changes in terms of the 
retirement funds that have been put in excess. We are trying to 
do all those things.
    But to say that we are always going to have a slow process 
when, in fact, market ought to determine--just as your 
testimony said--what the price ought to be that you are paying. 
And they are not going to do something that is going to kill 
their volume because that is what they need right now. They 
need volume and revenue.
    And so, I understand where you are coming from representing 
your industry and I appreciate it, but it is like I have told 
everybody in your industry, there is going to be more than an 
inflation cost because we cannot even meet the commitments that 
we have now to the postal employees unless there is something.
    Now, how much that will be versus how much volume loss that 
is, they are never going to make a decision that gives them 
less revenue. They are going to make a decision that gives them 
more revenue, and that volume/price relationship is going to be 
determinative in the marketplace. And so, you have an extra 
Governor out there for you because they need you, they want 
you, and they are not going to run the prices up on you 
excessively. I am out of time. I will let you go and then I 
will come back.
    Chairman Carper. Mr. Cerasale, are you ready for a break?
    Mr. Cerasale. No.
    Chairman Carper. Pick on somebody else here for a minute or 
two?
    Mr. Cerasale. It is a good discussion.
    Chairman Carper. Real good discussion.
    Mr. Cerasale. It is one we should have. This is an 
important question.
    Chairman Carper. Back when we introduced this bill, what we 
hoped to do was to foster a good discussion and we certainly 
have, and this is continuing. I guess it is going to continue 
next week and well beyond. But this has been a real helpful 
hearing to us thus far.
    I have a couple of questions. I am going to ask each of you 
to take maybe less than a minute and just give us a closing 
thought, so you will be thinking about what you want to leave 
us with. Then we are going to wrap it up and head for the 
hills.
    I want to come to, if I could, to Mr. Weisberg. I held up 
earlier this mailer that I got, Mr. Weisberg. I do not know if 
you were here when we did it, about sort of the re-branding of 
Express Mail. They call it Priority Mail Express. I have a 
really smart new product and one that I think is actually going 
to make a lot of money for the Postal Service. We will see if 
that is true.
    But you said earlier you cannot just cut, cut, cut, 
although there are a lot of ways to save money. The Postal 
Service has identified those. They have worked with their 
unions, their employees, the Board to do that. But we talked a 
little bit, briefly, about what we need to do to reduce the 
Federal budget deficit further. We are down from $1.4 trillion 
to $700 billion. What do we need to do further? I have said we 
need entitlement reform that saves money, saves programs, does 
not savage old people or poor people. That is No. 1.
    No. 2, we need tax reform to actually generate some 
revenues. And we need to figure out how to get a better result 
for less money in everything we do. It is interesting to me how 
many people have said to me over the last 4 or 5 months, they 
are willing to pay a little more in taxes. They just do not 
want us to waste their money. That is what they say. They say, 
I am willing to pay some more taxes. I just do not want you to 
waste the money.
    So for us on the Postal side, that means we have to look at 
the cost side and where we can take costs out, what do we need 
to do in our jobs, here in Congress, to enable those savings to 
be realized. And obviously, the unions have to be a part of 
this, in the give and take process with management.
    But even after we have done a fair amount on the cost side, 
there is some more to be done. A big discussion on health care, 
very important discussion next week on health care, as you 
know. I just want to come back to you. I appreciate very much 
your insights.
    But you talked about how public/private partnerships are 
the best path forward for the Postal Service, I think you said, 
the success of PC postage, which certainly supports your point. 
How can the Postal Service help create a more nurturing 
environment for the marketplace to create new products that 
help its customers? That is No. 1.
    And second, we know you are not a futurist. Neither are we. 
But could you offer any insights on what untapped innovation 
opportunities might be out there for the Postal Service? And 
you referred to a couple of those. The Postmaster General gave 
us a pretty good list.
    Our friend, the Inspector General, gave us a pretty good 
list. But just anything that you heard out there, anything of 
your own. What are some other untapped innovation opportunities 
that you are aware of that you would certainly underline, 
highlight, say for God's sake, do these? Please.
    Mr. Weisberg. Thank you very much. For your first part of 
the question on how to foster public/private partnerships in 
the development of technology, I would really point to working 
well with your partners, doing deals with them in a fair and 
square way, and for us, we would also say not unfairly 
competing with your own business partners.
    So it is really a focus on working together well, putting 
good incentives in place, and then getting out of the way to 
let it be done efficiently and well. And the Postal Service has 
worked for us very well in that way, I would say. One 
suggestion I would have for the Postal Reform bill in that area 
is some language that you will see in the House bill that talks 
about making sure the Postal Service is not unfairly competing 
with postage evidencing providers.
    In the second part of your question, where are the real 
revenue opportunities for growth through innovation, and it is 
in packages. You have been hearing about it. The Postal Service 
has a huge role in packages. They have a tremendous cost 
advantage by going to all of the consumer locations. There is 
huge growth coming in the delivery of packages, and the Postal 
Service is getting the smallest share of it amongst its 
competitors today.
    By having cutting edge technology, that means product 
developments, updates that happen on a daily basis, that means 
having 24-7 high quality, high touch customer support, all of 
the modern things that a technology company can do, the Postal 
Service has a tremendous opportunity to continue to grow the 
package business in a big way for many years to come. So it is 
really innovations around that.
    And if you look at what has been set up with the PC postage 
industry, our salespeople can go working hand-in-hand with the 
Postal Service sales force to a company that needs to get up 
and running shipping packages, even a large company, and have 
them shipping overnight.
    We had one example where a major health care provider, 
Kaiser in Southern California, had a sudden need, because of 
DHL being shut down, to get drug prescriptions really quickly 
to its customers. They came to us at 5 p.m. one day. The next 
day they were printing out all of the Express Mail shipping 
labels to do it.
    In order to do that, you really need a private technology 
company that lives and breathes--we are based in California--
the way that those companies work to be able to get customers 
up and running quickly and to do it in an efficient way. All of 
that without the Postal Service paying money for it. For the 
Postal Service to try to do that itself would just be so much 
less efficient.
    Senator Coburn. I just had a few questions for Mr. Beeder. 
I am a big buyer of cards. When I go in a place, I buy them.
    Mr. Beeder. Thank you very much.
    Senator Coburn. You talk about inflation, though, over the 
last 10 years. I just have some examples. It is your birthday. 
That is a $3.69 card.
    Mr. Beeder. And worth every penny of it.
    Senator Coburn. Well, it depends.
    Mr. Beeder. OK.
    Senator Coburn. I am going to make a point here.
    Mr. Beeder. OK. I know you are.
    Senator Coburn. Here is a card that is $3.99. This was made 
by your competitor. Here is a cheap one. It is only 99 cents. 
So let us just take--oh, and this one is a Superman for Senator 
Carper, $5.99. So let us just take, for example--I do not know 
what the average is, but let us say $2. And a postage stamp 
right now is what?
    Mr. Beeder. Forty-six cents.
    Senator Coburn. Forty-six cents. And inflation last year 
was what?
    Mr. Beeder. What was it, Senator, 3 percent?
    Senator Coburn. Less than 2 percent.
    Mr. Beeder. OK.
    Senator Coburn. All right. So 2 percent on 46 cents is a 
penny. Now, let us say if the average cost is $2 and you went 
up inflation, that is 4/10ths of 1 percent. If you went up 
twice inflation, that is about 6/10ths of 1 percent. So you 
went up twice inflation. Do you think that the demand price 
curve on your card, which is--I think $2 is way too cheap for 
the average card in terms of my assessment.
    Do you think that actually makes a difference? Instead of 
the one penny increase or two penny increase, do you think that 
actually makes a difference when I am buying a $5.99 or $4.99 
card, especially when it is all around holidays? Explain to me 
your concern about a 4 percent postage increase for the 
mailing--in your section of the mailing industry and how that 
works economically, because I really do not understand it.
    Mr. Beeder. Well, you mentioned holidays. A good number of 
the cards sent through the Postal Service are actually holiday 
cards. And when you buy a holiday card or an invitation or even 
a piece of stationary and you want to mail it, you will buy 
frequently a holiday card, 20 of them in a box for $6 or $8.
    So the cost of that card would be 30 or 40 cents, not $2. I 
wish every card we sold was $2.
    Senator Coburn. Almost every one I buy is way more 
expensive than that.
    Mr. Beeder. Can I have your name and number? We will get 
you some marketing materials.
    We are concerned because the holiday volume is so strong 
that the postage stamp actually costs more than the greeting 
card. So that when you increase the prices on postage, you 
fundamentally change the economic equation of a consumer who 
might be sending 60, 80, 100 cards on the holiday and they have 
to fund all of that postage. That is where it really hits home 
in our industry.
    Regarding the pricing of those greeting cards, one of the 
things that we have worked very hard on, that you have 
encouraged the Postal Service to work on, is innovation. So we 
have competition from the Internet, we have competition from 
all of these online sources, so we have improved the capability 
of what greeting cards can do so that we can compete with those 
services. Greeting cards walk, they talk, they bounce, they 
jiggle, they have Superman on them and----
    Senator Coburn. They sing songs.
    Mr. Beeder. That is what we have to do. But we do not live 
in a monopoly environment. We have to compete in the 
marketplace against all types of things and if we do not 
deliver innovation and keep track of prices, make sure that we 
support the Postal Service as we can, it impacts our business a 
lot.
    Senator Coburn. So why would not somebody who is going to 
send 50 greeting cards this Christmas buy a Forever stamp?
    Mr. Beeder. They could do that this year. But in future 
years, as the pricing goes up, the price of the Forever stamp 
will go up, too. That is a solution that might bridge them over 
for a year or two. We are thinking about the long term, 
Senator.
    Senator Coburn. OK. Thank you very much.
    Chairman Carper. Every week at this time there is a Bible 
study group that meets over by the Capitol and one of the 
things that Barry Black always tells us--he is our chaplain, a 
Navy Admiral, Chief of Chaplains for the Navy and Marine Corps. 
He always implores the Senators usually the ones that show up 
are the ones, those of us who need the most help.
    But one of the things he always urges us to do is to pray 
for wisdom. So that is something that a lot of my colleagues 
and I do. We need to, God knows. I am not going to ask what 
your prayers are for us, but in terms of imparting some wisdom, 
this is a chance to give us just a quick closing statement. I 
will ask you to use less than a minute if you will. I am going 
to start, Mr. Guffey, with you, Mr. President. Just something 
you really want us to take to heart as we walk out of here.
    Mr. Guffey. Just two things real quickly. This is for the 
Senator from Montana who is no longer here. What people have to 
understand, these offices where they close a plant down, there 
are a lot of towns around those plants. And mail would get 
picked up there at five in the evening, taken over to this 
plant, and be worked and returned back, 1-day service.
    Now since they do not work the mail in Plant A, the mail in 
these small towns has to leave those towns to get over here to 
Plant B to be worked earlier in the day, say like at one 
o'clock. That means all the cards that are picked up, or people 
want to mail invitations for their kid's birthday party, or 
sympathy cards for a funeral that week or something, they drop 
it in the mail and the carrier comes by and picks that mail up.
    Then they take it back to the office. Well, the dispatch 
time has already gone by. So if this is Friday evening, it does 
not get over to Plant A until Saturday and over to Plant B 
until the following Monday and that is when those cards are 
canceled.
    So those 3 days do not even count in the Postal Service's 
system. When they cancel it, then it gets marked into the 
Postal system and it goes through and their records show 1-day 
delivery, 2-day delivery, when they have actually added maybe 
2, 3, or 4 days on there that do not even count. That is one 
thing and I have heard two other----
    Chairman Carper. I am going to ask you, I said 1 minute and 
you are up to 2 minute. One more thing and that is it.
    Mr. Guffey. OK. That is it. The issue about privatization. 
Let us talk about privatization. Just two things about that. 
All these small countries over there like England and what have 
you, have a great transportation system, do not require 
movement of mail by airlines. And they also have socialized 
medicine which means they do not have any current costs for 
their employees in health insurance and they do not have any 
future retiree costs.
    Chairman Carper. That is not true for all of them, but go 
ahead.
    Mr. Guffey. Well, it is for England and Germany, sir. And 
to say that is just to say this. They have more expensive--.6 
pounds is $1 over here; Germany, it is 78 cents. It is more 
expensive and they have it privatized and they have it outside. 
And they do not have discounts. They do not have discounts for 
big mailers.
    Now, we have a system over here that works, it is better 
for everything, so privatization is not a situation, I think, 
that works in this country.
    Chairman Carper. OK. Thanks so much. Ms. Dwyer, please be 
brief, if you will. Get right to the point.
    Ms. Dwyer. All right. I will try. The rural letter carriers 
have always been service oriented. That is what I talked about 
today. We are passionate about it. We believe it. And I am here 
to tell you, if you try to cut it to 5 days a week, you will 
destroy the Postal Service.
    Chairman Carper. OK.
    Ms. Dwyer. We have a firm belief that is true. Listen to 
the numbers that I gave you today. The Postal Service can 
succeed. Allow us to do that. Unshackle us from the pre-
payment. Do that and give us a chance to be viable, keep us in 
an environment where we can succeed and we will do that.
    Chairman Carper. All right. Thanks. That was great. The 
legislation that Dr. Coburn and I have introduced says, 
essentially, a year after enactment of the bill, the Postal 
Service may go from 6 to 5-day per week services. You still 
have to have post offices open, access to postal boxes, they 
still have to do parcel and package delivery, and they are free 
to provide the service even on Sunday if they can find a way to 
make that financially viable.
    But if there is any chance to ensure that when the Postal 
Service, a year after enactment of our bill, for example, that 
they decide not to go to 5-day-a-week service, it is for them 
to have found ways, innovative, new products, new ways to 
generate revenues off this legacy organization. And the other 
thing is to find ways, especially on the health care side to 
save money. That is the 800-pound gorilla here in the room. I 
know you all are working on that and I would ask that we just 
continue to do that, good conversations, good negotiations. I 
would just urge you to keep those up. Mr. Beeder.
    Mr. Beeder. Affordable rates are critical to consumers' 
participation in the Postal system and the provisions in this 
bill raise the prospect of a number of negative outcomes. 
Without adequate review, it is likely that inappropriate rate 
increases could be imposed with no practical remedy available 
to mailers. The USPS oversight not only provides price 
stability, but also fairness among mailers, subject to the 
monopoly provisions of the non-competitive categories.
    Chairman Carper. Good. Thank you, sir. Mr. Cerasale.
    Mr. Cerasale. Yes. The monopoly is something that we are 
concerned about. The CPI cap has been an incentive to rein in 
postal costs and without it, we think or fear it is too easy to 
raise postage. And in the scoring battles we have had in 
previous postal reform legislation, the Congressional Budget 
Office (CBO) has found increasing postage decreases the 
likelihood of cost-cutting. And I would be very worried about 
that.
    Chairman Carper. Thank you. Mr. Weisberg.
    Mr. Weisberg. I would like to help us all leave on a 
positive note. The Postal Service has done a fantastic job in 
working with the PC postage industry and is just starting to 
reap the benefit of that growth. There is a huge opportunity in 
the growth of e-commerce shipping and we look forward to 
working with the Postal Service to help get the benefits of it.
    Chairman Carper. Thanks. Dr. Coburn, any last word?
    Senator Coburn. No. I would like permission to put just a 
little statement into the record on cross-subsidization, 
statements of Mr. Cerasale that he has made in terms of 1996\1\ 
and 1998 where his industry was worried about cross-
subsidization.
---------------------------------------------------------------------------
    \1\ Additional information submitted by Senator Coburn appears in 
the Appendix on page 221.
---------------------------------------------------------------------------
    Chairman Carper. Good enough. Without objection.
    We are at the point to adjourn. I just want to again thank 
you very much for being here, for preparing for your testimony, 
and for giving it, for answering my questions. I also want to 
say, I see behind Mr. Cerasale the Postmaster General. We asked 
him to stay. We are delighted that he stayed.
    We have another hearing. Some of you will be back. But 
whether you are at the hearing and speaking, we are going to 
have some time for continuing this dialogue. I think I leave 
here more encouraged than not. There was hope in a hopeless 
world. And we have to keep working hard to get there and I 
think we will. God bless you. Thanks so much.
    [Whereupon, at 12:44 p.m., the Committee was adjourned.]











                            A P P E N D I X

                              ----------                              



[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]




                     OUTSIDE THE BOX: REFORMING AND
                      RENEWING THE POSTAL SERVICE,
              PART II--PROMOTING A 21ST CENTURY WORKFORCE

                              ----------                              


                      THURSDAY, SEPTEMBER 26, 2013

                                     U.S. Senate,  
                           Committee on Homeland Security  
                                  and Governmental Affairs,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10 a.m., in room 
SD-342, Dirksen Senate Office Building, Hon. Thomas R. Carper, 
Chairman of the Committee, presiding.
    Present: Senators Carper, Levin, Pryor, Tester, Baldwin, 
Heitkamp, Coburn, Johnson, and Ayotte.

              OPENING STATEMENT OF CHAIRMAN CARPER

    Chairman Carper. The Committee will come to order. Welcome, 
everyone. We meet today for the third hearing that we have held 
this year to consider the financial challenges facing the 
Postal Service, and this is the second since Dr. Coburn and I 
put forth a comprehensive, bipartisan proposal to address those 
challenges.
    As I mentioned at our hearing last week, one of my top 
goals since joining this Committee has been to not just help 
the Postal Service get by, but to help it become strong again 
and remain viable for the long term.
    Despite my efforts, and despite the efforts of our 
predecessors on this Committee and those of Postal management, 
Postal employees, and others, we find ourselves closer than we 
have ever been to losing the vital services that the Postal 
Service offers to all of us. At risk as well are the 
approximately 8 million jobs that depend on its continued 
vitality.
    The Postal Service has maxed out its credit line with the 
Treasury and is rapidly running out of cash. Despite an 
improving economy and some positive signals from some parts of 
its business, its immediate future is not bright. Absent 
legislative intervention, the Postal Service will likely limp 
along for a while unable to invest for the future, with its 
employees and customers uncertain of what that future holds. 
But it can only limp along for so long.
    There is no single easy solution to this problem. It is a 
problem that has been years in the making and will take years 
still to fully address. But with urgent action from the 
Congress and the Administration, the collapse of the Postal 
Service is avoidable, and I would just say action from the 
Board of Governors (BOG), action from Postal management, and 
from the unions who represent the Post Office, and from the 
employees themselves. This is a shared responsibility, and we 
are certainly a big part of that responsibility.
    Last week, my colleagues and I debated the tough decisions 
that will need to be made in the coming months and years 
regarding the level of service that the Postal Service should 
offer the American people. We also discussed how it should 
price and market its products. Most importantly, we heard about 
a number of innovative ways, really an encouraging number of 
innovative ways that the Postal Service can make itself 
relevant to a new generation of customers by taking creative 
advantage of its one-of-a-kind retail, processing, and delivery 
network.
    Today our focus will be the Postal workforce and the steps 
that the Postal Service must take to make sure it has the right 
people with the right skills as it works to survive and thrive 
in the years to come. We will also touch on the financial 
obligations the Postal Service--and, by extension, the 
Treasury--has made to Postal employees and how those 
obligations should be funded.
    At its peak in 1999, the Postal workforce totaled some 
800,000 people. Today the Postal Service employs just under 
500,000 men and women to service an ever-growing number of 
addresses across the country. This is possible due in part to 
the recent declines in mail volume, but also to automation and 
some hard work on the part of Postal management and the rank-
and-file to make processing and delivering the mail more 
efficient. More must be done in this area, and the bill that 
Dr. Coburn and I have introduced we believe will help.
    Our bill would also help end longstanding debates about how 
much the Postal Service owes the Treasury for its employees' 
pension and health care obligations, how much it should be 
paying to fund these obligations, and how aggressive its 
payment schedule should be.
    On pensions, we would require the Office of Personnel 
Management (OPM) to use more accurate data on how Postal 
employees are paid and how much they actually draw down over 
their lifetimes from the Federal Employees Retirement System 
(FERS) and from the Civil Service Retirement System (CSRS). 
This reform would likely save the Postal Service billions of 
dollars over time. It would also show that the Postal Service 
has overpaid its obligations to the Federal Employees 
Retirement System, and result in a refund of as much as $6 
billion.
    On health care, we would end the extremely aggressive 
schedule put in place in 2006 to pay down the Postal Service's 
unfunded retiree health obligation, a schedule more aggressive 
than any I have ever seen in State or local governments, 
municipal governments, or, frankly, in the private sector.
    That payment schedule was put in place for a noble purpose 
about 7 years ago. The goal was to make certain that a then-
healthy Postal Service that faced an uncertain future due to 
the growth in electronic communications was putting away as 
much money as it could so that taxpayers would not be stuck 
with its health care bill. But the size of the payments have 
been crippling.
    Our bill would create a more sensible and affordable 
schedule for paying down the vast majority of the Postal 
Service's long-term obligation over the next 40 years. It would 
also give the Postal Service access to the more than $40 
billion in its retiree health account today to pay its growing 
costs related to premiums for current retirees.
    These reforms alone would make the Postal Service's books 
dramatically better and free up cash that it can use to invest 
in innovation, its vehicle fleet, and other long-neglected 
needs. But the reforms in our bill intended to enable more 
efficient use of the Medicare benefits the Postal Service and 
its retirees have paid for have the potential to dramatically 
reduce its outstanding health care obligations and, as a 
result, its retiree health prefunding payments.
    Finally, our bill would give the Postal Service and the 
unions representing the employees the authority that they need 
to have a full, a robust, and hopefully a productive 
conversation about the package of pay and benefits current and 
future Postal employees should receive. Unlike other proposals 
that have been made over the years, our proposal would not 
enable layoffs, would not abrogate union contracts. It would 
seek to ensure that anyone whose job might be displaced in one 
area would clearly have another place to go in the Postal 
Service, so that no one would actually in the end lose their 
jobs. The workforce would be reduced, continue to be reduced, 
but it would be done through attrition, and it would be done in 
a humane way.
    We seek to require in our legislation, as I said, a 
conversation about tradeoffs between labor and management. This 
reflects the fact that it is not my goal and I do not think it 
is our goal to make Postal employees alone bear the price 
associated with fixing the Postal Service.
    I have said there are three groups that I hope that we are 
mindful of as we legislate, that we are fair to, and they 
include customers, Postal customers, they include Postal 
employees, and they include taxpayers. Those are the three, for 
me the three key groups.
    Before I turn to Dr. Coburn for his statement, I just want 
to thank him and his staff for working with us to be able to 
put together, after a long time and a lot of work, this 
bipartisan legislation. We know it is not perfect. We know it 
is not the finish line. But I think it is certainly well 
intended, I think a well-constructed compromise, and one that 
we seek to improve on as time goes by.
    The Postal Service faces serious challenges. A lot of 
people are working very hard to overcome those challenges. We 
have been working very hard to be a good partner. This is a 
problem that can be fixed.
    I will close with these words: I think one of the things 
that is missing right now to move our economy from a modest 
economic recovery to a robust economic recovery is concerns 
across this country, can we govern, can we be fiscally 
responsible as a country, can we provide certainty, 
particularly with respect to our Tax Code? Those are the three 
elements that nationally are needed to get our economy moving 
in an even stronger way. And I think when you have 7 or 8 
million jobs that flow from the Postal Service, that depend on 
the Postal Service, we could do a whole lot in terms of helping 
the economy, boosting the economy, by providing the certainty 
that is missing and the certainty that is needed. We can fix 
this problem, and our goal, our challenge, is to do that with 
the help of a lot of people in this room and people who are 
listening to and watching this hearing today.
    And now I am happy to turn to my colleague and my cosponsor 
on our legislation. Tom.

              OPENING STATEMENT OF SENATOR COBURN

    Senator Coburn. Thank you, Senator Carper.
    Most of you know we put out this draft bill after working 
for a long period of time with a lot of the stakeholders, with 
the Postmaster General. But it is a draft bill, and this is one 
of multiple hearings that we are going to have on it.
    But I would give this warning to everybody involved in this 
process: If you do not like what is in this bill and you want 
to solve the problem, you cannot just complain about what is in 
the bill. You have to come with an alternative solution that 
accomplishes the same goals.
    So having said that, there are three options: One is the 
Post Office has to continue to be able to trim its costs in a 
way that is both ethical and proper; it has to figure out how 
to achieve greater revenues; and, finally, the third option--
which is not an option--is to have the taxpayers of this 
country bail it out. It is not going to happen.
    And so I am very appreciative of John Kilvington and 
Senator Carper and the rest of his staff in terms of working. I 
think we can be a model for compromise.
    This bill is not finished. Everybody knows it is not 
finished. We are going to try to have a modified bill before we 
ever go to markup based on what we hear from these hearings and 
what we can accomplish. But it cannot be, ``No.'' It has to be, 
``No, but here is a different solution.'' I hope that the 
people that testify today recognize that. We are going to solve 
this problem. We are going to get a bill. Tom and I are 
committed to forging a compromise that we can get through our 
Committee and we can get to the Senate floor. We are going to 
do that based on our personal relationship, but also 
recognizing the responsibility, as he said, to govern. We are 
going to do it. The fact that not anybody really likes the end 
product is probably the sweet spot of where we need to end up 
being.
    So I want to thank him again. He is a good friend of mine. 
The word ``friend'' is used pretty cavalierly in the Senate and 
not sincerely. But Tom Carper is a friend of mine, and I am 
willing to make tough choices to make him successful and us 
successful in accomplishing that.
    I yield back.
    Chairman Carper. Tom, thank you for those kind words.
    We have been joined by Senator Pryor, Senator Johnson, and 
Senator Heitkamp. We welcome all of you. And with that, we are 
going to turn to our first panel of witnesses.
    The first witness is a new face. We have not seen him here 
before. I think his name is Donahoe. But, Postmaster General, I 
am glad we do not have to pay you on a per appearance basis 
because the debt would be even greater.
    Mr. Donahoe is the Postmaster General--he has his deputy 
right there behind him. Ron, it is nice to see you--but 
Postmaster General and Chief Executive Officer (CEO) at the 
Postal Service. Mr. Donahoe has spent his entire career at the 
Postal Service, beginning as a clerk in his hometown of 
Pittsburgh, Pennsylvania. He spent many years in top leadership 
positions before being appointed Postmaster General in 2010, 3 
years ago. It must seem like three decades ago, but it has only 
been 3 years.
    Our next witness is Jonathan Foley. Mr. Foley is Director 
of Planning and Policy Analysis at the U.S. Office of Personnel 
Management, where he is responsible for providing advice on a 
range of topics that include the Federal Employees Health 
Benefit Program (FEHBP). Before taking on his current position, 
Mr. Foley developed and implemented primary health care policy 
for the New Zealand Ministry of Health from 1999 to 2008. How 
we ever got you to leave New Zealand to come and take this job 
is beyond me, but we are glad you did.
    Next is Frank Todisco, Chief Actuary at the U.S. Government 
Accountability Office (GAO). In that capacity Mr. Todisco 
serves as an adviser to the agency on major Federal programs 
and policies pertaining to retirement security, health care, 
and life and casualty insurance. Frank, it is good of you to 
join us. We are an admirer of the folks that you work with, you 
and your team, and very grateful for your help.
    The final witness for this panel is John Dicken. Mr. Dicken 
serves as Director for Health Care Issues at the U.S. 
Government Accountability Office, where he leads the agency's 
assessments of private health insurance and prescription drug 
pricing issues.
    We thank all of our witnesses for being here. Your entire 
testimonies will be made part of the record, and feel free to 
testify. We will set the clock at about 7 minutes. Try to stick 
to that if you can, and if you go way beyond it, we will have 
to bang the gavel.
    So welcome, Postmaster General. You are up. Take it away. 
Thank you.

TESTIMONY OF THE HON. PATRICK R. DONAHOE,\1\ POSTMASTER GENERAL 
        AND CHIEF EXECUTIVE OFFICER, U.S. POSTAL SERVICE

    Mr. Donahoe. Thank you. Good morning, Mr. Chairman, Dr. 
Coburn, Members of the Committee. Thank you, Mr. Chairman, for 
calling this hearing.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Donahoe appears in the Appendix 
on page 451.
---------------------------------------------------------------------------
    There is a fundamental question to be answered about the 
future of the Postal Service, and it is this: Will the Postal 
Service be given the authority and flexibility that enables it 
to continue as a self-funding entity?
    I believe everyone wants that answer to be yes. The Postal 
Service can be profitable and pay down its debt. It can 
continue to provide secure, affordable, and reliable universal 
service. It can continue to meet the needs of rural America. It 
can continue to drive economic growth. It can continue to be a 
responsible employer and a great place to work. And if given 
flexibility and authority to adapt in a changing world, it can 
meet all of these goals without becoming a burden to the 
American taxpayer.
    The choice is simple: greater flexibility and authority now 
or massive taxpayer exposure and service degradation later.
    The Postal reform bill of 2013, S. 1486, goes a long way 
toward putting us on the path to financial stability. It 
provides flexibility and authority in many critical areas, and 
most importantly, it acknowledges our primary challenge: The 
related issues of health care benefits and the need to prefund 
liabilities.
    As currently written, the bill would provide significant 
savings, but as both you, Mr. Chairman, and you, Dr. Coburn, 
have noted, it remains a work in progress. Working together 
with all stakeholders and by including stronger language 
regarding Medicare integration and health care costs, Senate 
bill 1486 can accomplish the goal that we all share.
    As the Committee knows, we are seeking additional authority 
under the law to control our health care costs. We want to 
negotiate better and more cost-efficient health care coverage 
for our employees and retirees and ensure better integration 
with Medicare. If we do so, we can virtually eliminate our 
unfunded liability for retiree health care benefits. We can 
also reduce the amount that we will need to set aside for 
retirees in the future to an amount that we can manage. This in 
turn will secure lifetime coverage for all of our retirees. It 
will maintain choices for our employees and retirees, and it 
will immediately reduce our health care cost burden from 20 
cents out of every revenue dollar that we bring in to just 8 
cents. This is a savings of approximately $8 billion a year 
through the year 2016 compared to our current expenses.
    Today the Postal Service and its employees are paying for 
benefits we do not use. We are effectively buying insurance we 
do not need, and we are overpaying for it. Both the Postal 
Service and our retirees have paid $27 billion into Medicare, 
yet many do not draw the benefits that they are entitled to. 
And so we are obligated to overpay to compensate for this fact.
    Under the current law, the Postal Service and its retirees 
pay full freight into insurance companies within the FEHB 
system. Instead, our retirees should be using Medicare A, B, 
and D as their base coverage. Under this vastly preferable 
scenario, the Postal Service and our retirees would merely need 
to fund far less costly benefits wrapped around Medicare 
coverage.
    This is more than just a budgeting issue. This is an issue 
of fairness. It is fundamentally unfair to ask our employees 
and retirees, and ultimately our ratepayers and potentially 
taxpayers, to continue to needlessly overpay into health care 
insurance.
    In simple terms, we are merely asking to be able to manage 
our retiree health care not by reducing benefits, like many 
other employers that we hear about today, but by wrap-around 
supplementary plans around Medicare. This will allow us to 
maintain current levels of coverage, generate annual savings 
for both the Postal Service, our employees, and our retirees, 
and we can do this simply by eliminating unwanted overpayments.
    Does the Postal Service have an obligation to employees and 
retirees to provide health care insurance for decades to come? 
Of course it does. And the best way to meet that obligation is 
to create a program that is financially stable in the long 
term.
    Our proposal accomplishes that goal. We have developed our 
plan with leading experts in the field, which is essentially 
the approach that nearly every other company takes and one that 
the GAO has supported. If we are allowed to negotiate our own 
health care plan, either within or outside of the FEHB Program, 
the Postal Service will be able to provide the same or better 
coverage at a much lower cost for the vast majority of our 
employees and our retirees.
    I cannot overstate how important it is for the Postal 
Service to have its own health care plan or to have a health 
care plan through FEHB with the OPM, work with us to negotiate 
a new integrated plan that gives us choices specifically for 
the Postal Service within the FEHB.
    We want to work with this Committee to establish an 
effective and sustainable health care program for our employees 
and retirees. We want Senate bill 1486 to include clear 
mandates for the Postal Service, the FEHB, and OPM to make this 
happen.
    Mr. Chairman, by taking this approach, the Postal Service 
can reduce annual costs by up to $8 billion a year annually 
through 2016. This goes a long way to closing the projected 
budget gap that will exist in 2016 of $20 billion, if we do not 
take action.
    Yesterday the Postal Service announced a price increase 
above the rate of inflation. We did not want to take this step, 
but we have little choice due to our current financial 
condition. Resolving health care issues will mitigate the 
pressures to raise prices and take other unpalatable steps in 
the future, but we must fully address our health care costs in 
order to do so.
    I would like to thank the Committee for taking up Postal 
reform legislation this year and holding this important hearing 
again today. I look forward to answering your questions and 
supporting your work in any way that I can.
    This concludes my remarks. Thank you.
    Chairman Carper. Thank you, General Donahoe.
    Mr. Foley, please proceed.

 TESTIMONY OF JONATHAN FOLEY,\1\ DIRECTOR, PLANNING AND POLICY 
         ANALYSIS, U.S. OFFICE OF PERSONNEL MANAGEMENT

    Mr. Foley. Chairman Carper, Ranking Member Coburn, and 
Members of the Committee, thank you for the opportunity to 
testify regarding reform of the U.S. Postal Service, including 
changes to employee benefits. As program administrator for the 
Federal Employees Health Benefits Program, Civil Service 
Retirement System, the Federal Employees Retirement System, and 
fiduciary for the health and pension trust funds underpinning 
these programs, OPM has an interest in reforming the benefits 
available to the Postal Service workforce.
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    \1\ The prepared statement of Mr. Foley appears in the Appendix on 
page 471.
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    The Postal Accountability and Enhancement Act (PAEA) of 
2006 required the Postal Service to prefund retiree health 
benefits to cover the Postal Service's liability for the health 
care costs of current and future retirees under the FEHB 
Program. Due to its financial difficulties, the Postal Service 
was unable to make the required fixed payments due in fiscal 
years 2011 and 2012. OPM calculates the actuarial liability at 
$94 billion as of September 30, 2012. Subtracting the fund 
value of $46 billion, there remains an unfunded liability of 
about $48 billion.
    With respect to retirement benefits, Postal Service 
contributions to FERS total approximately $3 billion per year. 
These expenses are incurred only on behalf of those employees 
enrolled in FERS. The FERS funding and employee cost-sharing 
requirements are the same as those that apply to all non-postal 
agencies and employees.
    The President's Fiscal Year (FY) 2014 budget includes 
short-term relief and long-term reforms to the Postal Service, 
including a proposal allowing OPM to calculate the Postal 
Service's share of its FERS costs using postal-specific 
demographic assumptions. In the proposal, the amount of any 
postal FERS actuarial funding surplus as most recently computed 
according to governmentwide actuarial assumptions would be 
refunded to the Postal Service in 2013, and any remaining 
amounts would be refunded in 2014 and 2015 after OPM has 
completed a demographic study of Postal Service data to 
determine a postal-specific normal cost.
    The Postal Reform Act of 2013 would authorize the Postal 
Service to negotiate retirement benefit terms for new employees 
and to create new health benefit plans which may be offered 
within the FEHB Program.
    Section 102 of the legislation would grant labor 
organizations and the Postal Service the authority to negotiate 
retirement benefits for employees. OPM is concerned that the 
ability to negotiate retirement benefits, especially whether an 
employee is covered in FERS, will result in disparate execution 
of benefits. Tracking and reporting variable employee deduction 
rates based on bargaining unit and time period would be 
immensely time-consuming and costly, resulting in delays in 
retirement claims processing for all agencies.
    Additionally, OPM has technical concerns with Section 
102(a)(1). Employee retirement contributions to the Civil 
Service Retirement and Disability Fund resulting from 
negotiated agreements require clarification. OPM would like to 
work with the Committee to address these technical concerns.
    Section 104 would authorize the Postal Service to enter 
into individual or joint collective bargaining agreements with 
bargaining representatives to create a single Postal Service 
Health Benefits Plan. The Postal Service and its employees and 
retirees are well served by the FEHB Program. OPM's overhead 
costs for the FEHB Program are only 0.08 percent of total 
premiums. These very low overhead costs have been achieved by 
the accumulated experience of the agency and its staff having 
managed these programs for decades. In addition, annual premium 
increases for FEHB plans are typically at or below industry 
averages. In fact, the average growth in FEHB premiums has been 
below 4 percent for each of the last 3 years.
    A withdrawal of Postal employees and actives would have a 
particular impact on health plans with a large postal 
population. Postal Service employees and retirees represent 
more than 50 percent of the enrolled population in 23 FEHB 
plans. If these plans were to choose to withdraw from the FEHB 
Program, their remaining non-postal members, approximately 
90,000 people, would need to choose another plan.
    Section 104 could also have the effect of eliminating 
retiree health coverage for employees who become enrollees in 
the Postal Health Plan that is outside of Chapter 89. These 
enrollees would not be able to carry FEHB into retirement, and 
the Postal Health Plan would not extend health insurance 
coverage to retirees. If this is not the intent of Congress, 
OPM could provide technical assistance to address this matter.
    Section 105 would remove postal actives and annuitants with 
both Medicare Parts A and B from the FEHB risk pool and create 
separate FEHBP enrollment options for health benefit plans with 
a separate risk pool for these individual and family members 
covered by Medicare Parts A and B. Postal annuitants without 
Medicare coverage, with Medicare Part A only, or Medicare Part 
B only, would be the only postal groups to remain in the 
original FEHB Program risk pool. Because the groups to be 
removed are less expensive than those employees and retirees 
that are to remain, we anticipate this change will result in an 
increased cost to the FEHB Program on a per enrollee basis. If 
Postal employees and retirees are removed from the FEHB Program 
risk pool under both Sections 104 and 105, costs under the 
original FEHB Program risk pool would increase by about 2 
percent per enrollee. However, the impact on premiums from 
individual plans with high concentrations of postal enrollees 
would be considerably greater.
    Any effort to return the Postal Service to financial 
sustainability requires careful analysis in order to avoid 
unintended consequences. We look forward to working with the 
Committee to assist the Postal Service in addressing its fiscal 
challenges.
    Chairman Carper. Mr. Foley, thanks so much for that 
testimony.
    Mr. Todisco, you are recognized. Please proceed.

TESTIMONY OF FRANK TODISCO,\1\ CHIEF ACTUARY, APPLIED RESEARCH 
 AND METHODS, AND JOHN E. DICKEN, DIRECTOR, HEALTH CARE, U.S. 
                GOVERNMENT ACCOUNTABILITY OFFICE

    Mr. Todisco. Thank you, Chairman Carper, Ranking Member 
Coburn, Members of the Committee. I will be making a single 
statement on behalf of GAO, and then Mr. Dicken and I will both 
be available to answer questions.
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    \1\ The prepared statement of Mr. Todisco appears in the Appendix 
on page 475.
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    Thanks for the opportunity to testify today on Postal 
Service pension and health care benefit issues. As shown in 
Table 1 of our written testimony, the Postal Service had $96 
billion in unfunded benefits and other liabilities at the end 
of fiscal year 2012. These liabilities have become a large and 
growing financial burden, and the Postal Service's financial 
condition will make paying for them highly challenging.
    Our testimony focuses on our work on three particular 
benefit issues: Funding Postal Service retiree health benefits, 
the Postal Service's proposal to establish its own health plan 
outside of the Federal employees health care program, and the 
treatment of potential surpluses under the Federal Employees 
Retirement System.
    First, funding retiree health benefits. We reported last 
December that Congress needs to modify the Postal Service's 
retiree health prefunding payments in a fiscally responsible 
manner. We noted that the payment schedule under current law is 
significantly front-loaded, with payment requirements through 
2016 that are well in excess of the actuarially determined 
amounts. We have also stated that the Postal Service should 
prefund any unfunded retiree health benefit liabilities to the 
maximum extent that its finances permit.
    One reason for prefunding is to protect the Postal 
Service's long-term viability by paying for retirement benefits 
as they are being earned. To the extent prefunding is 
postponed, larger payments will be required later when they 
likely would be supported by less first-class mail volume.
    Fully funded benefits also make promised benefits more 
secure. However, the Postal Service currently lacks liquidity, 
and no prefunding approach will be viable unless the Postal 
Service can make the required payments.
    We have raised concerns about proposals to lower the 
funding target from 100 percent to 80 percent. An 80-percent 
funding target would lead to a permanent unfunded liability of 
roughly 20 percent, which would mean about a $19 billion 
unfunded liability at today's level.
    Next, the Postal Service's proposed health care plan. GAO 
recently reported that the Postal Service would likely realize 
large financial gains from its proposal to establish its own 
health plan outside of the Federal employees health care 
program, FEHBP. The Postal Service's proposed plan is designed 
to increase postal retirees' enrollment in Medicare as well as 
take advantage of Medicare's subsidies for employer-based 
prescription drug plans.
    Of the nearly $55 billion the Postal Service projects in 
reduced health benefits liability from this proposal, nearly 
$49 billion is related to fuller coordination with Medicare. 
The withdrawal of all of the nearly 1 million postal enrollees 
from FEHBP would represent about a 25-percent decrease in FEHBP 
enrollment. Nonetheless, most remaining non-postal enrollees 
would likely not be significantly affected by a Postal Service 
withdrawal.
    Note that the Postal Service has recently discussed the 
possibility of a new postal health program that would be 
offered within FEHBP, whereas we analyzed the prior proposal to 
go outside of FEHBP. Further, if Postal enrollees were allowed 
to voluntarily select whether or not to participate in new 
postal plans within FEHBP, the impact on Postal Service savings 
and on FEHBP premiums could vary from prior estimates.
    As Congress considers proposals for a Postal Service health 
care plan, it should weigh the impact on Medicare, which also 
faces fiscal pressure. Other important issues include 
safeguards for plan assets, which would include the almost $50 
billion of retiree health assets, and protections for plan 
participants comparable to those in the Federal health program.
    Last, treatment of FERS pension surpluses. We have reported 
on several key considerations regarding the release of any FERS 
pension surplus to the Postal Service.
    First, it is important to note that estimates of retirement 
benefit liabilities contain a high degree of uncertainty and 
can change over time.
    Second, regarding the proposal to use postal-specific 
actuarial assumptions rather than governmentwide assumptions to 
measure the Postal Service's liability, we support using the 
most accurate assumptions possible, subject to such assumptions 
being recommended by an independent body.
    Third, we have pointed out that a release of the entire 
surplus could be considered as a special one-time action as 
part of a larger package of reforms, but that returning 
surpluses whenever they developed would likely eventually 
result in an unfunded liability. We have suggested alternative 
formulas that could be used to address any future surpluses.
    Finally, any decisions on the FERS surplus should be made 
cognizant of the Postal Service's various other unfunded 
liabilities.
    In closing, GAO continues to believe that a comprehensive 
package of legislative actions is needed so that the Postal 
Service can achieve both short-term and long-term financial 
viability and ensure adequate benefits funding for more than 1 
million postal employees and retirees.
    This concludes our prepared remarks. We would be happy to 
answer any questions.
    Chairman Carper. Mr. Todisco, thanks so much. Our thanks 
again to all of you. Very constructive testimony, and we want 
to dig into it, but let me just, if I could, sort of set the 
playing field and go back a week ago to our previous hearing. 
One of the things we talked about at that time was rightsizing 
this enterprise. Much as the auto industry has rightsized 
itself over the last half dozen or so years. What the Postal 
Service is attempting to do is to rightsize the enterprise, and 
we are trying to not be an impediment but actually to help you 
do that.
    If you go back a dozen or so years ago, the workforce, I 
think as the Postmaster General said, was about 800,000 people. 
Today it is just under 500,000. If you go back about half a 
dozen years ago, my recollection is that the number of postal 
processing plants in our country was about 600. We are now down 
to roughly 300, 325.
    Among the most encouraging things that I heard last week at 
our hearing--I do not know about Tom and the others that were 
there, but when you, Mr. Postmaster General, and other 
witnesses talked about how do we take what is unique about the 
Postal Service's one-of-a-kind distribution system that goes to 
every mailbox in the country at least 5 or 6 days a week, how 
do we take that legacy distribution center and find new ways to 
make money out of it in a digital age? And I thought the ideas 
that came forward were just very encouraging. This cannot be 
just about cut, cut, cut. This has to be about how do we 
innovate and find new ways to make revenues, and I think there 
are some great ideas out there. And some of them are already 
being implemented.
    Before we leave here today, I just hope that we develop a 
clearer understanding amongst ourselves and with our witnesses 
on two or three key points.
    One is the issue of is it fair, is it appropriate, is it 
equitable for the Postal Service to continue to pay into 
Medicare and to overpay into retirement for its employees? We 
know the Medicare trust fund is not in good shape, but is it 
fair to ask the Postal Service and its employees to continue to 
pay into a Medicare system where they are not actually getting 
the full benefits from it? Is that fair?
    Second, is it fair for the Postal Service--well, let me 
just back up. There are two retirement systems, we know, into 
which the Postal Service and employees have paid: The Civil 
Service Retirement System, the oldest and the Federal Employee 
Retirement System which most of the people who work for the 
Postal Service pay into. When I introduced legislation, gosh, 
almost 3 years ago, at the beginning of the last Congress, on 
postal reform, I actually said it looks like the Postal Service 
has not only overpaid its obligation to the Federal Employee 
Retirement System, the newer system, but maybe as much as $50 
billion or $75 billion into the old system. And I thought, boy, 
this is going to make solving this problem easy. We will just 
get that money back from the Civil Service Retirement System, 
and we will be off to the races.
    Well, it was not that easy. And as it turns out, there are 
a lot of folks who did not believe that there had been that 
overpayment into the Civil Service Retirement System, and they 
included OPM, they included the Office of Management and Budget 
(OMB), they included the Administration, they included GAO. So, 
frankly, some of the key people that we looked to help us make 
those decisions said, no, not the case.
    There is, however, agreement that there has been an 
overpayment in the Federal Employee Retirement System, and it 
appears to be that there is going to continue to be an 
overpayment going forward because of the actuarial assumptions 
that we use for Postal employees. And, one, we have the 
opportunity, I think the obligation, to try to take some of 
that overpayment into FERS and return it to the Postal Service, 
not to spend. What I think the Board of Governors wants to do 
is to pay down its obligation to the Treasury, some of it at 
least.
    The other question is: What do we do about making sure 
going forward we do not continue to have that overpayment into 
FERS? I think the bill that Dr. Coburn and I have introduced 
seeks to address both of those in a fair and equitable way.
    The other thing, a long time ago when I was elected State 
Treasurer, we had no cash management system in Delaware. We 
could not balance our budget if our lives depended on it. We 
were a mess. And one of the things we set to work--Pete du Pont 
was our Governor, and we went to work trying to salvage the 
cash management system, to establish a pension fund, and to 
amortize that over 40 years. We did it in 10 years--not 40 but 
in 10 years. And in my last term as Governor, I was up meeting 
with the folks at the rating agencies--Moody's, Standard and 
Poors (S&P), Fitch--and they said, ``You guys have done a 
pretty good job on your finances,'' and they were about to 
raise us to AAA. But they said, ``There is one thing you have 
not done.'' And I said, ``What is that?'' And they said, ``You 
have not done anything to prepare for paying the health care 
costs of your retirees.'' That is what they said: ``You have 
not done anything.''
    So we went to work on that. We are still working on that. 
And we will be working on that in Delaware for a number of 
years.
    Well, we have an obligation, the Postal Service has a real 
obligation to set aside money for paying the retiree health 
care benefits. And the question is: How do we do it?
    The 2006 legislation said basically let us do it in 10 
years. I do not know of anybody, any business, any company, any 
level of government, that has that kind of obligation. It is 
just not responsible.
    What Dr. Coburn and I have said is this: It is almost like 
a 40-year mortgage. There is this obligation, let us pay it. 
Let us make sure it is going to be paid. Let us do it over 40 
years, not ignore it, not do it over 10 years, 20 years, or 30 
years. Let us do it over 40 years.
    Also, there is this question of money that has been set 
aside, the $40 billion that has already been paid. What do we 
do with that? And what we propose to do in our legislation is 
allow the Postal Service to use that money in the meantime to 
help meet the obligation to provide health care for its 
retirees.
    The last thing I want to say is this: I want to turn to GAO 
on this. I want to ask about the fairness, the equity of the 
Postal Service continuing to overpay into FERS but, most 
importantly, really paying twice for the health care, including 
overpayments into Medicare, for benefits that, frankly, they 
are not going to use.
    Would you talk to us about the fairness of that and what we 
ought to do? Thank you.
    Mr. Todisco. Well, I will talk first about FERS, and then 
Mr. Dicken will talk about the Medicare issue.
    It is in the nature of a defined benefit plan, which FERS 
is, that the future benefit payments are uncertain. We do not 
know how long people will live. We make estimates about that, 
when they will retire, et cetera. So it is an uncertain 
measure, the liability. It is going to change from year to 
year. And when you are close to 100 percent funding, which the 
Postal Service is for their FERS obligation, small changes in 
the liabilities up or down could put you into a surplus 1 year, 
a deficit the next year.
    That said, the estimates that are out there now seem to 
indicate that with revised assumptions, using postal-specific 
assumptions, there will be a bigger surplus than previously 
measured. And we have said returning that as part of a package 
of reforms could make some sense.
    But going forward, you talked, Mr. Chairman, about how to 
avoid surpluses in the future in FERS, and it is impossible to 
avoid surpluses or deficits completely, and you want to keep 
them small, and a way to do that is to stay with a fully funded 
target, and as you deviate from that a little bit from year to 
year, you amortize those gains or losses over some reasonable 
period of time, and you just keep heading toward that moving 
target.
    Chairman Carper. Go ahead, Mr. Dicken.
    Mr. Dicken. Regarding Medicare, indeed, the Postal Service 
and its employees have paid taxes that would be for the 
Medicare Part A and Part B. And, indeed, more than three-
fourths of Medicare-eligible Postal Service retirees have used 
Medicare Part A and B. The remainder, because they have paid 
those taxes, would be eligible if they have the 40 quarters of 
tax payments, but would also require for Part B that the 
retirees pay their share of the Medicare Part B premiums to get 
that coverage.
    About half the savings that the Postal Service estimates 
from their plan also come from coordination with the drug 
benefit in Medicare Part D, and as you know, that is funded 
differently and through not so much the taxes that have been 
paid but through other premium payments that would need to be 
made.
    Chairman Carper. OK. My time has expired on this round. I 
want to come back and drill down on this some more, Postmaster 
General and Mr. Foley, if you will.
    I will just close, before turning it over to Tom. My wife, 
as I said to some of you before, my wife retired from DuPont. 
When she turns 65--in about another 30 years--she will be 
eligible for Medicare, and they expect her to use it. They 
expect her to use it. They will provide a wrap-around plan. And 
it is not just DuPont that does this. It is just about every 
company of any consequence in this country. And the question 
is: Should the Postal Service be treated differently, should 
its employees be treated differently? And we do not believe so. 
Dr. Coburn.
    Senator Coburn. Mr. Dicken, let me ask you, was it your 
testimony just now that three-quarters of retired postal 
employees utilize Medicare A and B?
    Mr. Dicken. Right. Of those participating in FEHBP that are 
Medicare eligible, three-fourths have also enrolled in----
    Senator Coburn. So they are buying a Medicare wrap-around 
plan now.
    Mr. Dicken. They are buying----
    Senator Coburn. Three-quarters of them are.
    Mr. Dicken. That Medicare would become the primary payer 
for those if they are retired. FEHBP then would be the 
secondary payer.
    Senator Coburn. So only one-quarter of retired postal 
workers are not using Medicare.
    Mr. Dicken. What we have is that 77 percent have enrolled 
in Part A and B. Others have enrolled either in neither or only 
Part A or Part B.
    Senator Coburn. OK, but those are good numbers that we 
have, 77 percent are in A and B. That is a big fact we were not 
aware of. Thank you.
    Mr. Foley, I wanted to ask you a question. Based on your 
statement just a minute ago, it would seem to me right now that 
the Postal employees are subsidizing the rest of the Federal 
employees through FEHBP, because if you take backward what you 
said, a 2-percent differential, either their costs are less or 
they are paying more. So basically Postal employees in this 
country are subsidizing the rest of the Federal employees. Is 
that an accurate assumption based on your testimony?
    Mr. Foley. The nature of a risk pool that includes a lot of 
diverse employees and annuitants with different circumstances, 
the nature of the risk pool is such that there are gives and 
takes in terms of the costs per enrollee. And so if you remove 
a population--as I said in the testimony, a population that 
costs less than Medicare A and B covered individuals, it will 
increase the costs of those who remain in the pool.
    Senator Coburn. So the inverse is that postal employees 
today are presently subsidizing the rest of the Federal 
workforce, if that, in fact, is the case. If you pull them out 
and they are a lower-cost segment, you will see a resultant 
increase in the rest, because they are a lower-cost segment but 
they are paying the same. So they are in essence--and this is a 
key point for our Committee--Postal employees today are 
subsidizing the rest of the Federal workforce. And that is part 
of our problem, and that is part of the point that the 
Postmaster General has been making is that he can get a better 
package, a better deal, either in FEHBP or out, that will 
give--and here is the point: Senator Carper and I agree on a 
lot of things in this bill. We do not want the first Postal 
employee to see a change in the real benefit that they are 
getting. The question is: Can the Postal Service and can the 
employee get exactly the same benefit at a lower cost to the 
Postal Service? And your testimony, even though there are 
problems in executing this, as you outlined, would say that is 
true, because you just said 2 percent--at a minimum a 2-percent 
pop for everybody else, and this only represents a quarter of 
FEHBP, which implies a 6- to 7-percent subsidy by Postal 
employees for the rest of the Federal workers. I think that is 
an important note that we need to act on, and as far as being 
part of whatever we end up doing, is to recognize that 
disparity in our negotiations.
    I need two unanimous consents. Dr. Rick Geddes from Cornell 
has submitted testimony for our hearing, and I would like to 
submit that at this time.\1\
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    \1\ Statement for the Record from Dr. Geddes appears in the 
Appendix on page 544.
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    Chairman Carper. Without objection.
    Senator Coburn. And I would also like to put in a 
comparison from USA Today and also work my staff has done on 
average salary and benefits within the Postal Service by 
bargaining unit,\2\ and also nationally Federal, State and 
local, and private, and the comparisons, because the reason I 
want to put this into the record is if you look at the private 
sector, the benefits per employee average $10,589. At the State 
and local government level, it is $16,857. At the Federal 
level, it is $41,791. And that is a significant fact we need to 
bear in mind as we ask the Postal Service to be competitive, to 
be able to continue to deliver the magazines, the flats, the 
catalogues, and not have to raise those prices. We have to give 
them the capability to handle those costs in a more efficient 
way. So I would ask unanimous consent for both those things.
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    \2\ Statement for the Record from USA Today appears in the Appendix 
on page 551.
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    Chairman Carper. Without objection.
    Senator Coburn. Mr. Todisco, your testimony shows that 
Federal workers' compensation liabilities have grown from $7.7 
billion in 2007 to $17.6 billion in 2012, and these 
liabilities, as I understand it, do not include Postal workers 
yet to be added to the program. Is that correct?
    Mr. Todisco. That is correct.
    Senator Coburn. Do you think the Postal Service should 
prefund its workers' compensation obligations?
    Mr. Todisco. That is a policy decision. The Postal Service 
would be better off if those were prefunded. We recognize that 
there are not the funds right now to do that given the other 
unfunded obligations, including the retiree medical unfunded 
liability and the debt to Treasury. But it would enhance the 
long-term viability of the Postal Service if those benefits 
were funded.
    Senator Coburn. All right. In your testimony on the FERS 
overpayment, can you see a way that would address your concerns 
of this swing if we were to do something rather than just take 
overpayment, take the average 3-year rolling average of what 
that was, would that seem to be a more sensible way to address 
what the actual overpayment is so that we do not overshoot? 
What would you think about that?
    Mr. Todisco. Well, there is a policy decision about whether 
to do a one-time return of surplus, but aside from that issue, 
going forward, it does make sense to do some kind of smoothing 
as to how you react to those measurements from year to year.
    Under current law, when there is a deficit, that is 
amortized over 30 years. The annual payment is increased just 
to fund that over 30 years. When there is a surplus under 
current law, the Postal Service gets no financial benefit from 
that. That is an unfair asymmetry in current law which----
    Senator Coburn. For the Postal Service.
    Mr. Todisco. For the Postal Service that we have 
recommended fixing.
    Senator Coburn. All right. Thank you. My time is up.
    Chairman Carper. Senator Pryor. Senator Pryor slipped out. 
Senator Heitkamp, welcome.

             OPENING STATEMENT OF SENATOR HEITKAMP

    Senator Heitkamp. Thank you, Mr. Chairman. I just have a 
couple questions because I am mainly here to try and understand 
kind of a path forward. And, obviously, Mr. Foley and the other 
gentlemen are here representing and concerned about a plan, but 
we are concerned about the viability and the future of the 
United States Post Office. And a big part of that is exactly 
the discussion that Dr. Coburn just had with you, which is, we 
have to be able to pay our bills. We cannot be in the position 
of subsidizing other systems or having demands that competitors 
do not have in terms of your cost/benefit. And so it is with a 
great deal of sympathy that I have for the Postal Service in 
terms of the dilemma that they are in. So I just have a couple 
probably more technical questions.
    First, Mr. Foley, can you share OPM's analysis of the 
impacts of these provisions on the remaining FEHB? Your 
testimony indicated that costs would increase about 2 percent 
for the original program risk pool once the Postal employees 
and retirees are moved out, which I think we have discussed a 
little bit with Dr. Coburn. And I know that there was some 
debate last year on the very similar plan that some carriers 
might, in fact, see premium increases as high as 35 percent.
    What type of impact do you expect on those who would remain 
within the system?
    Mr. Foley. As I said, the overall impact is 2 percent, but 
the impact varies by plan. So if there is a large concentration 
of Postal employees and annuitants in a plan and they are 
removed, then it is likely that the premiums for that 
particular plan will increase.
    There are, as I said, 23 plans where over 50 percent of 
their enrollees are annuitants, Postal annuitants, and 
employees. There is a wide range in terms of the premium impact 
for those individual plans. They tend to be between 10 and 20 
percent for those plans, but there are some----
    Senator Heitkamp. This is always the danger of average, 
right?
    Mr. Foley. Right, and there are some that are higher. Those 
are among the 23 plans with the high concentration. FEHBP is 
fortunate to have a large number of plans, so as you see, the 2 
percent is reflective of that large group of plans.
    Senator Heitkamp. Also in your testimony, you mentioned 
significant concerns regarding the ability to administer 
retirement benefits if the post office is able to negotiate 
retirement benefits and create groups of employees with 
different benefits and deduction rates. You say that the claims 
processing for all agencies would be negatively impacted by the 
burden.
    Can you provide additional detail on that impact and how 
other Federal employees would be potentially harmed by this 
effort?
    Mr. Foley. The potential exists through this bargaining to 
come up with differential arrangements for different bargaining 
units, and the difficulty we have with that is that is not 
something that is part of the current system. So it requires 
developing a whole new way of measuring employee service time 
and reflecting that accurately in pensions. And so that is a 
burden actually on the Postal Service as well as on OPM to 
track that accurately and to make sure that we are making the 
proper pension payments. So it introduces complexity into an 
already complex system where there are a number of different 
arrangements depending on the employee's status. So for us, 
that will have an impact on the overall claims processing 
system because of the complexity of those particular 
arrangements.
    Senator Heitkamp. But you certainly can appreciate how 
dealing with this in a kind of broader context and designing 
new systems would create problems not only administratively but 
also huge uncertainties for the retirees and for the near 
retirees that are looking at these plans.
    Mr. Foley. We are happy to work with the Postal Service and 
the Committee to try to address those administrative concerns. 
We just feel obliged to point out that in an already stressed 
system, this puts further stress on that system.
    Senator Heitkamp. Right. I have a question for Mr. Todisco. 
In the Postmaster's testimony, he indicated his belief that 
better integrating Medicare with retiree health benefits, the 
post office would be able to virtually eliminate the need for 
its prefunding requirement. GAO has done significant research 
on this topic of the health plan proposal. Does the research at 
GAO indicate that the Postmaster is correct in terms of his 
assumptions?
    Mr. Todisco. Yes, with a clarification, if I may. The 
current liability is $94 billion; the assets are $46 billion; 
the unfunded is $48 billion. The estimate of the Postal 
Service's proposal to go outside of FEHBP, it would reduce that 
liability by $55 billion, thereby eliminating the unfunded. The 
liability would now be less than the assets already in the 
plan.
    There would still need to be prefunding going forward 
because the liability does grow over time as workers accrue 
additional benefits. And under the Postal Service's own 
proposal, they would propose to prefund going forward, but it 
would require a much smaller level of payment than under the 
current situation.
    Senator Heitkamp. And I am just trying to kind of get a 
handle around these numbers. That is even with the 77 percent 
number that Mr. Dicken reported, those same savings. I mean, 
you have taken all that into consideration.
    Mr. Todisco. Right. Just adding on the other 23 percent and 
integrating--and adding in Medicare Part D, you get that amount 
of savings.
    Senator Heitkamp. OK. Thank you.
    Chairman Carper. Dr. Coburn, did you want to interject 
something?
    Senator Coburn. Just a followup on Senator Heitkamp's 
discussion. If, in fact, FEHBP created separate plans inside 
FEHBP for the Postal Service, would your concerns, the 
administrative concerns, and the complexity be markedly 
decreased?
    Mr. Foley. Our preference is to work with the Postal 
Service inside the FEHBP and to do reforms both on the employee 
side and the retiree side.
    Senator Coburn. But you would testify that your concerns 
would be much alleviated if it was inside versus outside.
    Mr. Foley. Yes.
    Senator Coburn. The problems that your testimony gives, 
that is as if they go outside of FEHBP. Is that correct?
    Mr. Foley. That is correct. I will just point out and feel 
obliged to point out that, a lot of this has to do with the 
impact on Medicare, and so really there is a conversation with 
the Centers for Medicare and Medicaid Services (CMS) that needs 
to be brought into this. But speaking from the FEHB 
perspective, we are happy to work with the Postal Service on 
new benefit designs within the FEHB.
    Senator Coburn. All right. Thank you very much.
    Chairman Carper. OK. Let me just run through the order that 
we have. Senator Johnson is next, then Senator Baldwin; after 
Senator Baldwin, Senator Ayotte. Senator Tester has joined us 
and Senator Levin has joined us.
    Senator Johnson, you are next, and then, Tammy. Go ahead.

              OPENING STATEMENT OF SENATOR JOHNSON

    Senator Johnson. Thank you, Mr. Chairman.
    Mr. Todisco, let us define ``unfunded liability.'' My 
understanding of that is it is basically the amount of money 
you need in the bank today to fund future benefits. Correct?
    Mr. Todisco. That is correct.
    Senator Johnson. What is the discount rate you have used in 
calculating that $96 billion in your Table 1 on page 2 of your 
testimony?
    Mr. Todisco. That discount rate is actually selected by 
OPM, and I think it is 4.7 or--it is roughly in the 5-percent 
zone, but I do not have the----
    Mr. Foley. That is correct.
    Mr. Todisco. Thank you.
    Senator Johnson. So, again, you would be assuming you would 
have to make a 5-percent return on those invested funds in 
order to fund the future benefits. Correct?
    Mr. Todisco. That is correct, yes.
    Senator Johnson. Are there any investments right now that 
are guaranteeing 5 percent long term?
    Mr. Todisco. No, there is not.
    Senator Johnson. Pretty tough. So, in other words, with a 
lower investment rate, that unfunded liability would be 
actually higher.
    Mr. Todisco. That is correct, yes.
    Senator Johnson. And there is really no difference between 
unfunded liability and liability. It is just a liability that 
you have to pay sometime in the future.
    Mr. Todisco. Well----
    Senator Johnson. I mean, there is really very little 
difference.
    Mr. Todisco. Well, there is the liability. When there are 
assets supporting the liability, then the difference between 
the two becomes the----
    Senator Johnson. Right, correct, OK. I keep hearing that 
the retirement system, the health care system, has been 
overfunded improperly. Now, as I am looking at your Table 1 
here, what I am seeing is basically a $99 billion unfunded 
liability reduced by a $3 billion surplus in the FERS system. 
It does not look like there is anything that has been 
overfunded, I mean, other than you just segregate these little 
funds. And because of the calculation uncertainty of the 
discount rate, I do not see anything being overfunded in this 
fund. Is that an accurate assessment?
    Mr. Todisco. It is accurate. Out of the five different 
items we have in that table, the FERS piece is overfunded, but 
the other----
    Senator Johnson. So, again, explain to me, because I hear 
all kinds of complaints that we have just unfairly made the 
postal workers overfund their pension liabilities and their 
health care. What are they talking about there? I have never 
understood that.
    Mr. Todisco. Well, there are different arguments with 
respect to different programs. With regard to FERS, the 
argument is that there is a surplus there; further, that the 
surplus, if remeasured using postal-specific assumptions, would 
be even bigger. And so the argument there is that the FERS----
    Senator Johnson. But, again, that surplus could be wiped 
away by a different assumption in terms of the discount rate.
    Mr. Todisco. That is correct.
    Senator Johnson. And easily wiped away by just a little 
tweak in the discount rate, quite honestly. So there is really 
no overfunding that you can really put any kind of confidence 
in whatsoever. It could be just as easily way underfunded based 
on your discount rate assumption.
    Mr. Todisco. Well, as we have said, those liability numbers 
have a high degree of uncertainty.
    Senator Johnson. Correct. OK. If we go to a different type 
of health care plan, as is being proposed, the testimony is the 
postal system would save $55 billion, $49 billion of that 
apparently coming at the expense of Medicare. But, again, now 
we just heard testimony that 77 percent of Postal workers are 
already in Medicare. Did that $49 billion take into account the 
fact that 77 percent of postal workers already are taking 
advantage of Medicare benefits?
    Mr. Donahoe. Yes, it does, if they are in Part A and B. 
Right now they are not using the drug benefit in Medicare, so 
that is not currently being used.
    Senator Johnson. OK. So, again, if we are taking a look--I 
was kind of like consolidating the books of the Federal 
Government here, so you might be saving $55 billion for the 
Postal Service, but you are increasing the liability to 
Medicare and some other parts of the Federal Government by $55 
billion. Correct? I mean, we are really just robbing Peter to 
pay Paul. Or am I missing something here?
    Mr. Donahoe. We certainly report that the largest share of 
that, $49 billion out of that $55 billion, is related to 
Medicare integration. Much of that is from the Medicare 
program. Some of that is also premiums for Part B by retirees 
that would be enrolling, and some of it would be discounts from 
drug manufacturers that are flowing----
    Senator Johnson. And the remaining $6 billion would 
probably be the reduction in costs to the Postal system 
primarily because you have different actuarial postal-specific 
assumptions, so it adds that kind of 2-percent differential of 
Postal workers inside the FEHB. Correct.
    Mr. Donahoe. No. I would like to clarify, if I could--maybe 
to put a little light on this. The differential, what causes 
the overfunding, is the fact that when we do not integrate 
Medicare, we, in fact, pay more for health benefits. The 
average health benefit cost for a Federal retiree that is 65 
years old, including a Postal retiree, is about $7,000 a year. 
The Postal Service pays 70 percent, the retiree pays 30 
percent. In the private sector, a wrap-around plan averages 
somewhere between $4,000 to $4,500 a year. If we did that same 
math, we pay 70 percent, the employee/retiree pays 30 
compensation, there is a differential.
    When you take that and amortize that with a million people 
over the lifetime of those people, that is where the big 
overfunding is. What we are asking for, Senator, is to be able 
to be treated just like anybody else. We are the second largest 
payer into Medicare. We would just like to have integration of 
Medicare A, B, and D paid just like everybody else. That 
eliminates the $55 billion of overfunding.
    Senator Johnson. There are certainly private sector 
companies that provide retiree health benefits. Correct?
    Mr. Donahoe. There are not as many as you would think.
    Senator Johnson. But there are some.
    Mr. Donahoe. There are.
    Senator Johnson. So it would certainly be different 
treatment because those individuals are also paying into 
Medicare----
    Mr. Donahoe. Which we are.
    Senator Johnson [continuing]. Throughout their working 
life, and then they get employer-provided retiree health 
benefits.
    Mr. Donahoe. Which we do.
    Senator Johnson. But we are not recommending in this piece 
of legislation to reimburse their Medicare payments, are we?
    Mr. Donahoe. No. What we are saying--here is what happens. 
What we are saying is reamortize the amount of money based on 
the differential in a wrap-around plan versus the full benefit 
plan that we have to pay OPM. OPM and FEHB do not afford a 
retiree the ability to buy a wrap-around plan. That is what we 
would like to do. We would like to work with them to set that 
kind of a plan up to reduce the overall cost.
    From a Medicare perspective, the cost increase for Medicare 
on a yearly basis would be somewhere between $1 billion and 
$1.3 billion a year, so you are trading $55 billion in on the 
overpayment for us for a $1 billion cost increase.
    Senator Johnson. OK. And I understand that with the Postal 
system, but, again, I think it is important to point out that 
additional cost is going to be borne within the Medicare 
system, which, according to my 30-year projection, is about a 
$36 trillion deficit in Medicare over the next 30 years. One 
dollar of payroll tax going in, $3 of benefits going out. So, 
again, I understand how you are responsible for the Postal 
system, but I think it is important to point out from the 
Federal Government's standpoint, we are not saving anything.
    Mr. Donahoe. We have no argument----
    Senator Johnson. We are kind of just shuffling----
    Mr. Donahoe [continuing]. No argument with that. We agree 
that Medicare needs to be fixed. All we are asking for is a 
level playing field.
    Senator Johnson. OK. Thank you.
    Chairman Carper. Thanks, Senator Johnson.
    Senator Baldwin, welcome. Thank you.

              OPENING STATEMENT OF SENATOR BALDWIN

    Senator Baldwin. Thank you, Mr. Chairman. And I appreciate 
your providing a number of hearings on the draft legislation 
that you and the Ranking Member have introduced.
    I wanted to ask some questions related to input that I am 
hearing from my State and my constituents. In some ways these 
sort of changes affect all 50 States in similar ways, and then 
there are unique ways in which they impact States. Wisconsin is 
actually the No. 1 State in terms of paper production, and 
since what is sent around in the mail is usually on paper, we 
have a real impact. And so this legislation affords the Postal 
Service far more authority in setting its own rates above the 
rate of inflation and without prior authorization from the 
Postal Regulatory Commission (PRC).
    I am wondering, Mr. Donahoe, if you can talk a little bit 
about how you and the Postal Service will be good stewards of 
this expanded authority, and especially as it affects the paper 
industry and those obviously who rely heavily on your services.
    Mr. Donahoe. Thank you, Senator. I think that your point 
about paper is very true because 40 percent of paper ends up in 
the mail, and that is why the entire industry from the forestry 
and the paper producers and the printers and logistics 
providers sees it as critical that we resolve this issue, 
because there are substantial numbers of jobs that are affected 
by what we will decide here in the next couple of weeks and 
months.
    From our perspective, we think that the Board of Governors, 
as we talked about last week, should have the authority to set 
prices because we have the responsibility to manage the 
organization. I think that if you took a look at our 5-year 
plan, and we have done an actual look ahead 10 years, we have 
never included anything more than a Consumer Price Index (CPI)-
based price change in those plans. We think that there is a 
balance that must be achieved, especially addressing big costs 
like health care, along with some other infrastructure changes 
that we are proposing going forward to keep the Postal Service 
viable.
    We know that big price increases will dampen the demand for 
mail and hurt not just the Postal Service but the entire 
industry. Our Governors take that to heart, and we agree 100 
percent with you that is something that must be considered.
    Senator Baldwin. A century ago, Wisconsin passed the 
Nation's first workers' compensation program. Interestingly, it 
was under Governor Robert M. LaFollette, Sr., who at one point 
was a U.S. Senator in the seat that I now have the distinct 
honor of holding. We called him ``Fighting Bob LaFollette.'' So 
I know that there are a lot of provisions in this draft bill 
that make very significant changes to the Federal Employees 
Compensation Act (FECA), which is obviously relating to 
workers' compensation, and that the draft bill contains changes 
not just for the Postal Service workers but for workers 
throughout the Federal Government that result in benefit cuts, 
as I understand it. Under the cuts in the draft, Postal workers 
would receive 22 percent less under the Federal Employees 
Compensation Act than if they had worked a full career for non-
postal Federal employees, cuts are around 35 percent, if I read 
this correctly. And I have some strong concerns about this 
because it is my further understanding that this cut does not 
necessarily solve the long-term financial problems of the 
Postal Service.
    Also in the bill, obviously, there are changes that have 
been proposed in the prefunding of retiree health care plans 
from 100 percent to 80 percent. I think that is a step in the 
right direction. But I have heard from actuaries that we could 
go further, and I have heard perhaps as low as 30 percent, 
which would put the Postal Service on a path to sounder 
financial standing.
    So I guess the question is: Why would we go in the 
direction of cutting Federal employee workers' compensation 
benefits when the Postal Service actual financial problems can 
be better solved by further reducing the prefunding of the 
retiree health care? I want to ask that of you, Mr. Donahoe.
    Mr. Donahoe. OK. Thank you, Senator. A couple things on 
workers' compensation. First of all, I think it is important. 
Safety is a critical issue for the Postal Service. We have 
worked very well with the unions and the Department of Labor 
(DOL) over the last number of years to improve on that. Our 
illness/injury rate has dropped more than 50 percent. We are 
very proud of that. We have been very active--as a matter of 
fact, before the last couple of years, we were the No. 1 what 
is called the Voluntary Protection Program (VPP). It is the 
Occupational Safety and Health Administration (OSHA) VPP 
process that really recognizes people for having a safe 
workplace. We cannot agree any more strongly that the workers' 
compensation issues are a major issue. We do not like to see 
our employees get hurt.
    One of the things that we are faced with, though, is a 
liability. You heard the gentleman from the GAO mention that we 
have outstanding liabilities. Our liability for workers' 
compensation right now is $16.5 billion, and we have 16,000 
people on the workers' comp rolls. It would be in our best 
interest from a Postal Service perspective to do a couple 
things.
    No. 1, be able to reemploy these people. Many of them would 
like to come back to work, and we need to find jobs that they 
can do, and it certainly would help us.
    The other issue--and I think this is what is being 
addressed by the bill itself--is we have to find a way for a 
person to move off the rolls. We have people right now in their 
80s and 90s, we have a couple people over 100 years old still 
on workers' compensation. And there is no real incentive to 
leave that, and I think that is being addressed by the bill.
    But the key thing is accident reduction, do not let people 
get hurt, keep them safe.
    Senator Baldwin. I know I do not have a lot of extra time, 
but let me just try to add one more comment. You can react to 
if, you please.
    I have heard certainly from Postal workers in Wisconsin 
some concerns as we look at the staffing overall of the Postal 
Service that it is management heavy. And, I understand that you 
look at that in terms of ideals, management to craft employee 
ratio carefully and have ideal levels. I would just say in 
terms of optics we just had over the August work period an 
announcement of a closure of, at least, origination mail 
processing in my home town of Madison. Fifty-four employees 
were told that their jobs would be phased out and that the 
operation would move to Milwaukee at the same time as an 
announcement of three additional management staff being added 
to the same operation. So 54 are leaving, 3 management being 
added. Optics, it did not look very good.
    Mr. Donahoe. I would like to respond to that. Optics does 
not, and that is not something I stand for whatsoever.
    In the last 5 years, the Postal Service has reduced the 
head count by 205,000 people. American Postal Workers Union 
(APWU), the clerks union, has taken the largest hit. They have 
had a reduction of 37 percent. Management is at 32 percent. I 
take it very seriously that we do not pad management ranks. It 
is my feeling that our employees do the work every day; there 
is no reason why all of us should not be under the same 
requirements for change. We have not taken raises. We have not 
taken bonus money, pay for performance, anything like that.
    In terms of the rest of the crafts, mail handlers, letter 
carriers, rural carriers have taken a smaller impact, but, of 
course, with the route structure that we have today, you would 
expect that. But we are very serious about it, 32 percent, and 
I will look into the numbers up there in Madison.
    Thank you.
    Chairman Carper. Was there a time not long ago where senior 
management did not contribute to their health care coverage?
    Mr. Donahoe. We did not at one time, and this year we are 
contributing about 28 percent.
    Chairman Carper. Good. Thanks very much.
    All right. Next up, Senator Ayotte, and then Senator 
Tester.

              OPENING STATEMENT OF SENATOR AYOTTE

    Senator Ayotte. Thank you, Mr. Chairman.
    I wanted to followup, Mr. Dicken, on the question that 
Senator Johnson asked, because it just was not clear to me. 
Obviously, we are concerned about the fact that Medicare is 
scheduled to go bankrupt in 2026, and that this is a very 
important issue that needs to be addressed by the Congress as a 
whole to preserve Medicare for future beneficiaries and those 
who are going to rely on this important program, and also for 
fiscal responsibility and sustainability. So do we know at all, 
if we do this proposal with the implementation of the 
Postmaster General's plan, do we have any numbers of what the 
impact would be on the solvency of Medicare?
    Mr. Dicken. What we do know based on the Postal Service's 
proposal that we examined, and their estimates, is that for the 
first 5 years, the average increase in costs to the Medicare 
program would be $1.3 billion. That is the annual increase. 
That is a fairly small share of overall Medicare spending, 
which is over $550 billion a year, but it certainly needs to be 
weighed given that both programs are facing long-term fiscal 
sustainability issues.
    Senator Ayotte. And also with 44 percent of the Postmaster 
General's savings for 2016 coming from the Postal health plan, 
if enacted, this would be, I think, one of the largest 
determinants, if we adopt this proposal, of the postal health, 
financial health. And are there examples of similar withdrawals 
from FEHBP--I love acronyms in Washington--or restructuring? 
And what lessons can we take from those other examples to 
include in this proposal to make sure that this is successful? 
Have we done something like this before in another context that 
we can use as an analogy?
    Mr. Foley. There have not been withdrawals of this scale. 
There were withdrawals in the late 1980s and in the Federal 
Reserve and the Federal Deposit Insurance Corporation (FDIC). 
They returned to the FEHB in the late 1990s. It was a 
relatively small impact, but it was somewhat disruptive to have 
that in and out----
    Senator Ayotte. So they got out, and then they got back in?
    Mr. Foley. Exactly.
    Senator Ayotte. Is it because it did not work or is it 
because they did not realize the savings that they thought or 
for whatever reason they got out?
    Mr. Foley. They have separate authority to get out. I was 
not there at the time, but my sense was that they thought that 
they could strike a better deal with insurance companies by 
moving out. And that turned out not to be the case.
    Senator Ayotte. And so how confident are we that we can 
strike a better deal here?
    Mr. Donahoe. I think that we can. I think that when you 
bring a force of 1 million people to the marketplace, you have 
a lot more impact. I think that the reason the FDIC--and we 
will research this for you--went back was because they were 
faced with having to prepay retiree health benefits, and so 
they turned around and went back into the plan so they did not 
have to prefund them.
    But in our case, we have a million people, retirees and 
currents. We would be the largest single insured organization 
in this United States. We think that between either a plan with 
one provider or a set of providers, we would have the ability 
to force competition.
    Now, that said, we also have said in my testimony that we 
are perfectly willing to work with FEHB and carve out, as you 
would say, maybe a set of our health benefits plans. The unions 
and the Postal Service have worked, and we have identified 
about 16 plans that have over 90--it is probably about 95--
percent of our employees. If we took them and if we competed 
that and if we required those plans to provide the wrap-arounds 
for our retirees, it would answer the same issues that we are 
looking for right now. There are ways forward, plenty of 
options. We are not steadfast on one.
    Senator Ayotte. So we are talking about if we take the 
Medicare piece, what does that do to Medicare, so it is a 
shifting of Federal dollars that Senator Johnson talked about 
as well. So if you get out of FEHB and then you go out on your 
own, you have a million people, do we have any sense of whether 
that drives up the costs in FEHB? In other words, are we going 
to be shifting on that end? Have we done any numbers on that? 
Do we have a sense of--as we look at the big Federal picture 
here that we are responsible for?
    Mr. Donahoe. Sure. I think that both the GAO and the OPM 
have already commented on that. Do you guys want to----
    Mr. Foley. Yes, and it really depends on which population 
is taken out. The Medicare A and B population by carving them 
out has a 2-percent impact, increase in the premiums for the 
remaining FEHB population. So that was what I was speaking to 
in my testimony. And GAO can speak for themselves. The analysis 
they did was based on a slightly different proposal, so the 
impact was different.
    Mr. Dicken. And certainly when we looked at pulling 
entirely the Postal employees and retirees out, overall, even 
though that is a large percentage, 25 percent of current 
enrollment in FEHBP, the effect was modest for most plans that 
we talked to. The plans indicated that there might be small 
premium changes, increases in----
    Senator Ayotte. So, in your opinion, if you are looking at 
the Federal Government as a whole, is it a net gain--in other 
words, a savings I meant to say.
    Mr. Donahoe. From a Federal Government----
    Senator Ayotte. From a whole of Federal Government 
perspective.
    Mr. Donahoe. What I would tell you would be the whole 
Federal Government should compete their health care plans, 
instead of sitting with what we have with 200 health care plans 
that are not competed today. And I would tell you the whole 
Federal Government should take the same approach with the wrap-
around, because the difference with us is this: Ratepayers pay 
our funds. Taxpayers pay for the rest of the government. That 
is why we have insisted we should be treated like a private 
entity. We are already--from a Medicare perspective, 92 percent 
of our employees use Medicare A who are 65 or older, 77 percent 
use Medicare B. That is why it is not such a big hit on 
Medicare. We are paying for D. We do not have the access to it. 
All we are saying is this resolves a substantial portion of our 
problem for the Postal Service. It also protects our ratepayers 
because they are much more like a private sector company than 
the rest of the Federal Government.
    Senator Ayotte. And I know that my time is up, but just on 
the ratepayer issue that I know others have asked you about as 
well, with the drop in volume--and I know that is why you are 
here so that we can make reforms that are appropriate to 
protect ratepayers, but also to make sure that people get 
service and the Post Office continues to thrive. Do you think 
that one of the issues when you look at the financial piece of 
this here, you have $63.5 billion in unfunded health and 
pension liabilities, and so as we look forward, a lot of it we 
are talking about, OK, we are going to put a bunch of it on 
future ratepayers as well. And so how do we look forward 
toward--given the drop in volume we have seen, there are a lot 
of businesses that are relying on the Post Office as well. I 
mean, how do you view our ability to balance that? And I think 
that is a really big concern that many of us have of making 
sure that, yes, you do run it like a business, and in order to 
run a business, you would also make sure your customers are 
still there for you.
    Mr. Donahoe. That is a key critical issue. That is why we 
are here. Addressing the long-term health of the Postal Service 
is critical for a very large industry, and we have to get this 
resolved now. We have to get it done right. So resolving the 
health care, making changes in our infrastructure, moving from 
6-day to 5-day, making some changes as we have done with our 
unions, working through and having more non-career flexible 
people in the workforce, we have made some proposals on long-
term retirement changes. We think that we have an excellent 5-
year business plan with a 10-year look ahead that puts the 
Postal Service on very sustainable, firm ground for the next 10 
years.
    The key issue here is to resolve this so that from a Postal 
Service perspective and an industry perspective we can start to 
innovate and grow this industry. The mail is still the best way 
to get in front of somebody's eyes if you are sending a 
message, much better than the Internet, much better than any 
other way, because it is the most direct way to get there. So 
resolving this and getting back on growing this industry is 
critical.
    Senator Ayotte. And doing nothing is essentially, let us 
just let it go to bankruptcy, right? So we need to----
    Mr. Donahoe. That is why we are here.
    Senator Ayotte [continuing]. Get this done, is your 
message, right?
    Mr. Donahoe. You will never hear me say, do nothing. I 
mean, I probably do not have a lot of friends in Washington, 
but the issue is trying to make these changes so we can grow a 
very important industry and keep it healthy going forward.
    Senator Ayotte. Thank you. I appreciate all of you, and I 
know that this is not an easy problem that you have been asked 
to solve, so we appreciate that you are taking on these hard 
questions.
    Chairman Carper. I am Tom Carper, and I agree with that 
message. [Laughter.]
    And I am anxious to hear Senator Tester, his comments and 
his questions. Jon.

              OPENING STATEMENT OF SENATOR TESTER

    Senator Tester. Thank you, Mr. Chairman.
    I guess this question is either for Mr. Todisco or Mr. 
Dicken, and it goes back to the questioning that Senator 
Johnson asked. There is a $49 billion additional liability to 
Medicare if the changes are made to FEHBP. I believe you said 
that, Mr. Dicken. Is that correct?
    Mr. Dicken. That $49 billion of the financial gains to the 
Postal Service are for the more full integration with Medicare. 
That is composed of costs to the Medicare program, additional 
premium payments from Medicare Part B, as well as drug payments 
to drug manufacturers.
    Senator Tester. OK. So I will ask it again, and you tell me 
what the figure is, if it is not $49 billion. If the plan is 
implemented, there is a $49 billion liability to Medicare. And 
if it is not $49 billion, just tell me what the number is.
    Mr. Dicken. Indeed, the $49 billion offset, that is coming 
from different funding streams through the Medicare program, 
some through the trust fund, some through savings in the drug 
benefit, some through premiums from beneficiaries.
    Senator Tester. OK.
    Chairman Carper. Could we just drill down on that for a 
moment? Let us go to other folks on the--I was thinking it was 
about $900 million a year, is my recollection. But, Postmaster 
General, can somebody else----
    Mr. Donahoe. I think that the increase in the liability, 
Senator, to Medicare from our estimates and what we have shared 
with the GAO would be about $1 billion in year one and then 
$1.3 billion from there, because if you remember, a substantial 
number of our people already use Medicare, so the transition of 
those last ones would not really hit Medicare a whole lot 
harder.
    Senator Tester. OK. So----
    Chairman Carper. Dr. Coburn----
    Senator Tester. Go ahead.
    Senator Coburn. Let me add one other comment.
    Chairman Carper. This will not come off your time, Jon.
    Senator Tester. That is good.
    Senator Coburn. This differential is in the difference of 
what the post office could buy the exact same coverage with a 
wrap-around--no, but most of these savings--$1.3 billion a 
year, you multiply that times 30 years, that is $29 billion.
    Senator Tester. That is real money.
    Senator Coburn. OK. That is real money. But most of the 
savings comes from the difference in purchasing the exact same 
thing from purchasing a different way. There is no question we 
add to the liability of the Medicare program.
    Senator Tester. And that is the number I want to get, and--
--
    Senator Coburn. And that is $1.3 billion a year.
    Senator Tester. And I think we are talking to the GAO 
folks. I mean, you guys know this stuff, right, inside and out?
    Senator Coburn. It is their testimony.
    Senator Tester. Yes. So where did the $49 billion figure 
come from? Is that the total liability of the $1 billion per 
year initially and 1.3 years after that?
    Mr. Todisco. No, it is not. There are two figures out there 
as you have identified. The $1.3 billion is the annual increase 
in Medicare costs over the next 5 years. The $49 billion is a 
reduction in the Postal Service liability. That liability is a 
present value of payments going decades into the future. And 
the $49 billion consists of increased costs to Medicare as well 
as other elements such as participants paying Part B premiums, 
as well as discounts from the pharmaceutical industry from the 
Part D program.
    Senator Tester. Do you have a breakdown on that, by the 
way?
    Mr. Todisco. We do not have a breakdown on that.
    Senator Tester. Would it be a lot of work to get that 
breakdown?
    Mr. Donahoe. We can give that to you. We have a breakdown.
    Senator Tester. OK. I would like to do that. Thank you.
    Postmaster General Donahoe, last week I asked you if the 
post office would be closing post offices and processing 
centers while this debate of this current bill was going on, 
and you said, ``No, we have done what we need to do for the 
year.'' Yet just this week, I have heard about more closures. I 
mean, basically what I want to know is what do you mean? There 
have been more closures or consolidations, so what did you mean 
when you said, ``We have done what we need to do for the 
year''?
    Mr. Donahoe. Here is where we are right now: For fiscal 
year 2013 that we are in, we had a series of plants that we 
were consolidating. We also had a set of what we call stations 
of large post offices that we were either consolidating or 
moving. And then we are working through what is called the Post 
Plan, which is the smaller post offices moving to part-time 
hours. We are finishing that up for this year.
    When you asked me would we advance anything from next year 
in, I said no, we would not, and we would not do that. The Post 
Plan has been an ongoing plan. That is where we have been 
reaching out with the local people. Plants, we would not make a 
change.
    Senator Tester. And that plan goes through the end of this 
calendar year?
    Mr. Donahoe. The Post Plan will go to the end of next 
fiscal year, which will be September 2014, and that is the 
small offices transitioning.
    Senator Tester. So what you are saying is through September 
2014, next year, there are already things in motion that are 
going to close down processing centers and post offices. It is 
already in there. I am not talking about reduction of hours, 
just closures. The processing centers and post offices.
    Mr. Donahoe. OK.
    Senator Tester. And that plan goes through the end of 
September of next year, a year from now.
    Mr. Donahoe. Reduction of hours in small post offices is 
scheduled, and that is moving through. We are finishing up 
consolidation of plants now in fiscal year 2013. We will finish 
that before the holiday season. The ones that we have on target 
for next year--we have some starting in February, March, April 
of next year--those are the ones that I told you we would not 
advance. Where we are right now, we will freeze any of those in 
2014 pending the outcome of the legislation and just finish up 
what we have now, because these take time. If you want to do 
them right, you have to be very careful----
    Senator Tester. There is no ifs, ands, or----
    Mr. Donahoe. You have to do it the right way.
    Senator Tester. No ifs, ands, or buts about that, 
Postmaster General. I just want to know what we are doing, OK? 
And I still do not know. So the question is: At what point in 
time are your plans to stop closures going to stop? OK? So is 
it the 1st of December of this year? Is it the 1st of January 
next year? Or is it the end of September next year?
    Mr. Donahoe. Let us walk through; there are three streams, 
OK?
    Senator Tester. OK.
    Mr. Donahoe. Start with the smallest ones first. We have 
about 6,000 small post offices that we are in the middle of 
transitioning from 8 hours----
    Senator Tester. Reduction of hours.
    Mr. Donahoe [continuing]. Or 6 hours, down to 2, 4, and 6.
    Senator Tester. OK.
    Mr. Donahoe. That will continue to go through. We are 
trying to do that in a very organized manner so it does not 
disrupt customers. The other thing we are trying to do is make 
sure that our employees have a landing spot coming out of that. 
So that is one.
    Senator Tester. That is fine.
    Mr. Donahoe. The second one is in some of the larger cities 
we have excess facilities, we have excess space.
    Senator Tester. OK.
    Mr. Donahoe. We are in the process of moving those around 
to get rid of excess space. That is the second.
    Third are plants. So we are finishing up some plants right 
now. That will be done for the year before the holiday season, 
so that will finish up in November.
    We have additional ones scheduled for next year. Those are 
the ones I told you would not be advanced into this year. We 
will wait and see what happens with legislation.
    Senator Tester. Got you. OK. Is it possible to get that 
list of----
    Mr. Donahoe. Sure. We will come over and go through that 
with you.
    Senator Tester. Thank you very much.
    I just want to clarify something else that came up in last 
week's hearing and just correct me if I am wrong. I think that 
you stated it is your belief that under the current contract an 
arbitrator cannot consider the financial health of the United 
States Postal Service.
    Mr. Donahoe. I misspoke. What I should have said was that 
they can consider it, but they are not required by law not to 
consider it. I think that is where I misspoke.
    Senator Tester. OK.
    Mr. Donahoe. OK? I think that we clarified that for the 
record already, Senator. My people said, ``I think you said the 
wrong thing.''
    Senator Tester. Not that we ever make mistakes, so, yes, 
because I think the last three arbitrations there was a lot of 
financial----
    Mr. Donahoe. Oh, yes, absolutely.
    Senator Tester [continuing]. By the Postal Service.
    Mr. Donahoe. There is no requirement, but yes.
    Senator Tester. Thank you.
    Thank you, Mr. Chairman.
    Chairman Carper. I am going to come back to you, Postmaster 
General, for something, but before I ask you, let me telegraph 
my pitch. I want you to again just lay out--you are good at 
this. I just said to Dr. Coburn, I said, ``The Postmaster is 
pretty good at explaining this stuff,'' so I am going to give 
you a free, clear shot just to explain again what we are trying 
to do with respect to Medicare, what we are trying to do with 
respect to FEHBP, and what we are trying to do with FERS and so 
forth, just to kind of go through that. And then refer to some 
of the concerns that have been raised about that path forward, 
all right? And then rebut those. That is what I am going to ask 
you to do.
    Before we do that, I want us to keep this in mind. As 
important as the health care issues are to the long-term 
solvency of the Postal Service, it is not the whole ball game. 
As important as Medicare is, the prepayment for the retiree 
benefit, that is all important. As important as the FEHBP 
coverage is, Medicare A, B, D, all that is important. But let 
me just put it in context. Context includes last week's 
discussion. Context includes how do we enable the Postal 
Service to take this legacy organization, this legacy 
distribution system, and in the 21st Century make money with 
it? How do we do that? Is there a way to do it delivering mail 
6 days a week? If there is, what do we have to do with respect 
to pension obligations? What do we have to do with respect to 
health care, with Medicare, and all that? That all kind of 
works together.
    The Postal Service has done I think good work, I think 
humane work with respect to reducing distribution centers--and 
that is a big deal--from 600 to, gosh, 325 or so. And in our 
bill, we just basically say, OK, let us hold it there for now.
    Great work has been done I think in a humane way with 
reducing the head count from 800,000 employees a decade or so 
ago down to under 500,000, in a humane way.
    So all that has been done or is well on the way toward 
being done. So it is not just about health care. It is not just 
about Medicare. It is not just about pensions. But we need to 
do really something responsible, humane, and effective in all 
those areas if we are going to be successful in closing this 
$20 billion bogey.
    All right. General, that is the setup, and then the 
question is--hit us with your best shot. Make the case for the 
kind of reforms that we are talking about, that you are 
suggesting, that Dr. Coburn and I are trying to include in our 
legislation. Any criticism that you have heard that you would 
like to rebut, please do that. Thank you.
    Mr. Donahoe. Well, thank you, Mr. Chairman. Let me start, 
if I could, with health care. We feel it is our responsibility 
to prefund health care if we expect to keep it as a benefit. 
That is our responsibility, so you have never heard us say we 
should not do it. You have never heard us say that we should 
walk away from that. We have to resolve the problem.
    I think it is critical that people understand what the 
drivers are in this whole area. Our plan is to integrate 
Medicare because we think that we have paid into Medicare, it 
should be integrated, because our revenues are based on 
ratepayer revenues, not taxpayer revenues. So there are a 
couple key numbers that you have to consider.
    No. 1, a retiree from the Postal Service at age 65 pays an 
average of about $7,000 a year for a health care plan. That is 
the total cost, us and them. And that goes across the board, 
and that is done every year--this person makes that payment.
    The second thing is we are the second largest payer into 
Medicare, the Postal Service is, and we, unfortunately, are not 
able to take full advantage of that payment into Medicare 
because of the lack of requirements to use those benefits. So, 
A, we have 92 percent; B, we have 77 percent. By law we cannot 
use D.
    The third thing is this: In the private sector, an average 
health care cost plan is somewhere between $4,000 and $4,500 a 
person. That differential is what is driving all of this cost. 
So when you look at the long-term with that differential, and 
resolving that it cuts in half the health benefit payment into 
the prefunding that we need to make--if we can resolve that 
issue, if we can integrate Medicare and use that system that we 
have paid into and get the right health care payments based on 
what our ratepayers should be paying, we for all intents and 
purposes eliminate the need for any further prefunding. We 
will, therefore, be overfunded into FERS, within $16 billion 
funded into a $200 billion Civil Service Fund, we will be fully 
funded into the retiree health benefit, and that puts us in an 
excellent position going forward. The going forward is a 
critical thing.
    If you look forward in this organization, paper, over time, 
will start to disappear. That is why we have been so active in 
the package business. We know there are big opportunities 
there. We are not giving up on paper, but we know that if you 
take a long look on this, we will have issues going forward. 
And so that is why it is critical for us to resolve a number of 
these other issues.
    Getting the FERS payment resolved is also critical. All we 
are asking is paying our fair share. We overfund FERS right now 
by about $300 million a year. We have overfunded into that a 
little bit over $6 billion. We would like to take the $6 
billion back and put it against our debt. That almost cuts our 
debt in half.
    Our goal in terms of debt is to be debt free by 2017 so 
that as we have declining volumes--and we project about 5-
percent first-class decline in a year for the long term--we 
will be in good shape going into 10, 15 years out in a debt-
free environment.
    Other critical areas that we do need help is flexibility in 
terms of pricing and governance around what we do with 
products. We think that there are big opportunities still in 
the mail. It has to be affordable. We think there are big 
opportunities in the package business. It has to be affordable. 
We know that. But you also must act quickly. That is why we 
have asked to give us after-the-fact review instead of this 
laborious process that we have to go through still from a rate 
case.
    We had to file yesterday in order to make a rate change in 
January. I mean, we buy fuel every day, and the person changes 
the price with the flick of a switch. That is not a good 
environment to be in if you are trying to fight for your lives.
    The other key critical issues going forward is the ability 
to use the Postal Service, our resources, like our post 
offices, like our law enforcement, to play a key role--not 
competing with the private sector--but playing a key role in 
digital going forward. We talked about that last week. That is 
also in your bill.
    We fully support what is in your bill. We think it is very 
good. What we are looking for is just a little bit more clarity 
around the Medicare integration, and I think that will get us 
over the finish line.
    Chairman Carper. Well said. Thank you very much for that 
explanation. Dr. Coburn.
    Senator Coburn. Just a little history on Medicare. When 
Part B was started, it was to be a 50-50 payment differential 
between the participant and the government. We are at 25 
percent.
    Now, on average, the average couple pays in $110,000 for 
Medicare during their working lifetime and takes out $330,000. 
Senator Johnson has raised the concerns, about this unfunded 
liability's impact on Medicare, and I understand why we would 
want to look at the whole picture. But the fact is that 
fairness plays a role. There is not anybody else out there that 
cannot take advantage of Medicare if they paid into it. And 
what the Postal Service is saying is if we can provide exactly 
the same thing to our employees that they are getting today, at 
$2,800 per retiree per year cost difference, then we ought to 
be allowed to be able to do that.
    Now, that is a lot of money in terms of their cash-flow, 
and that is giving an equal service, not a poorer service, an 
equal service to their employees.
    So what we have to do is, as Senator Carper said, how are 
we going to look at all these pieces and try to come up with 
something that gives us long-term viability of the Postal 
Service, and that is the real issue.
    I have a question for you, Mr. Postmaster. One of the 
things that has really concerned me is the Department of Labor 
has recently suspended the transfer of the Federal Employees 
Compensation Act data to you all, which is crucial to ensuring 
your program integrity and good service to your employees. Can 
you please describe to the Committee the impacts that the 
Department of Labor's decision is having on you as an entity 
and also on your employees?
    Mr. Donahoe. Thank you, Doctor. The suspension is a problem 
for us. As I mentioned to Senator Baldwin before, safety is 
critical, and we are very proud of the fact that we have 
reduced the illness/injury rate by 50 percent. However, we have 
16,000 people on workers' compensation periodic rolls right 
now, and it has been our goal and it is consistently our goal 
to try to get them back to work. And part of the back-to-work 
process involves working with doctors, it involves working with 
our unions, it involves working with many people, and sometimes 
outside people, because we have actually placed people in jobs 
outside the Postal Service.
    The fact that everything is moved back to paper now is a 
major problem because it makes it much harder in terms of 
moving that information data around. I think there were some 
concerns about privacy. We have always taken the utmost care to 
protect the privacy of any individuals, and we will continue to 
do that. And we look forward--I have written the Secretary a 
letter--I would like to go up and sit down with him and work 
through this because it is in our best interests to get people 
back to work. We have a $16.5 billion liability in workers' 
compensation, and we have to address it, and the best way to 
address it is get people back to work.
    Senator Coburn. Yes, and a specific problem as far as you 
cannot get the case numbers, one.
    Mr. Donahoe. Yes.
    Senator Coburn. Your injured workers have tripled, with 
third-party billing and medication. Subrogation of claims data, 
you cannot get that.
    Mr. Donahoe. Right.
    Senator Coburn. And you cannot get any case verification or 
inquiries.
    Mr. Donahoe. No.
    Senator Coburn. All right. Mr. Foley, I had one other 
question. In your testimony, you said that the overall 
management cost of FEHBP is 0.8 of 1 percent. Is that the 
management cost inside the government, or is that the 
management cost including your major contractor who runs this 
program?
    Mr. Foley. OPM runs the program. We have health plans that 
incur administrative costs, and that is built into their 
premiums. But the number I cited was reflective of OPM's costs.
    Senator Coburn. So that includes the management costs of 
the health plans that run this program, that 8----
    Mr. Foley. No, it does not.
    Senator Coburn. What is that figure as a percentage of the 
total cost?
    Mr. Foley. It varies by plan. The larger plans are between 
5 and 6 percent, the large national fee-for-service plans. The 
smaller Health Maintenance Organizations (HMOs) are between 10 
and 15 percent.
    Senator Coburn. All right. Thank you. I think I will submit 
the rest of my questions for the record so we can get to the 
next panel.
    Chairman Carper. OK. Fair enough. Senator Johnson, please.
    Senator Johnson. Just a couple quick ones.
    First of all, so my questions are not misinterpreted, I 
have a great deal of respect for Tom-squared here in terms of 
what they are trying to do, and, Mr. Postmaster General, if it 
were up to me, I would set you free. I am incredibly impressed 
with what you are trying to do and the challenges you face.
    Just kind of getting back to the whole Medicare issue, 
talking about 77 percent of Postal employees already taking 
advantage of Part A and B, whatever that is, do we know a 
calculation of what it costs Medicare currently on an annual 
basis?
    Mr. Dicken. I do not think we have a breakout for Medicare 
costs for Postal employees----
    Senator Johnson. Do you think it is more than $1.3 billion 
that we would be saving annually? I mean, are there--in other 
words, the Postal employees are already into Medicare for $5, 
$10 billion a year. I am just trying to get some sort of sense 
there.
    Mr. Dicken. We do not have the number, but given that is 
the majority of the postal retirees, that would be a larger 
cost.
    Senator Johnson. OK. That would be something I would like 
to find out. It is kind of a key point.
    Mr. Donahoe, can you tell me, why is there such a big 
difference? What is the difference between the $7,000 and the 
$4,500 in terms of a Postal Service person, a retiree at the 
age of 65 versus the private sector?
    Mr. Donahoe. Sure.
    Senator Johnson. Is it more generous benefits?
    Mr. Donahoe. First, Senator--no. It is not that at all. I 
think that if you asked Mr. Foley, he could tell you that there 
are no wrap-around plans available right now within FEHB. There 
has never been an incentive to actually encourage people to use 
the Medicare wrap-around because, from a taxpayer's 
perspective, that would be considered a shift of costs from 
another Federal agency onto Medicare. From our perspective, the 
fact that our ratepayers pay our way, we look at ourselves much 
more from a private sector perspective. And so what we are 
saying is rather than paying a higher-priced FEHB plan, we 
would much rather have the lower price than have the accounting 
and the actuarial numbers go against that number like----
    Senator Johnson. But basically the $7,000 pays for the 
entire health care cost where the $4,500 is a wrap-around plan 
around Medicare.
    Mr. Donahoe. Right. It is inefficient. We are paying for 
more than we need. You do not need a big----
    Senator Johnson. No, I understand, but so really you have 
less value in terms of what the $4,500 is buying than----
    Mr. Donahoe. The $4,500 pays for what you need. What you 
end up doing, it would be like--it is like throwing $3,000 down 
the drain.
    Senator Johnson. OK. Let me go back to GAO. Do we know the 
total value paid by postal workers into Medicare today, the 
total value? Is it $50 billion? Is it $100 billion?
    Mr. Dicken. I believe the Postmaster General gave you 
what----
    Mr. Donahoe. $27 billion.
    Senator Johnson. $27 billion to date? OK. That is really 
all I have Mr. Chairman. Thank you.
    Chairman Carper. It is $27 billion per----
    Mr. Donahoe. That is since inception.
    Chairman Carper. Day, week, month, year?
    Mr. Donahoe. Total since 1983.
    Chairman Carper. OK. All right.
    Senator Johnson. Let me just clarify that. My 
understanding, that is the amount of payroll taxes paid by 
postal employees into the Medicare system from its inception of 
Medicare to date?
    Chairman Carper. No, I do not think so. Can----
    Senator Johnson. OK, well, as long as they have been doing 
it, then. OK.
    Chairman Carper. Let us just make sure we get a correct 
answer to all of us on the record. OK? On that question.
    Mr. Donahoe. Can I ask a clarifying question?
    Chairman Carper. Please, sure.
    Mr. Donahoe. Do you want to get that from the GAO or from 
us?
    Chairman Carper. Both.
    Mr. Donahoe. OK. Will do.
    Chairman Carper. And then we will compare.
    Senator Coburn. Let us get it from both so we can see where 
the discrepancy is.
    Chairman Carper. All right. I asked Dr. Coburn if he had 
any more questions, and I think not, nor do I, not for this 
panel. It has been a real good conversation and given us some 
great input, and some clarification is still needed.
    One of the questions I have is for you, Postmaster General. 
It sounds like there needs to be a conversation between you and 
the Secretary of Labor on the workers' compensation issues, 
some of the FECA matters. Can we be helpful there in 
facilitating a good conversation, we want to be helpful.
    With that having been said, we are grateful for your 
testimony, for your work, and look forward to continuing to 
work with you to--if it is not perfect, make it better. We know 
what we have introduced is pretty good. We think it is. We know 
it is not perfect. We want to make it better. Thank you very 
much. [Pause.]
    I am going to ask the second panel to take their seats, 
please. I would ask the audience to help us restore some order 
here.
    Gentlemen, welcome. How many of you were here to hear the 
testimony and the questions for the first panel, raise your 
hand. It looks like everybody was. Good. Thank you for doing 
that. Almost everybody was.
    I am happy to see the Postmaster General and Deputy 
Postmaster General are remaining for the second panel. I think 
that is very helpful. That is something that Dr. Coburn has 
always suggested. I am glad you are doing that. But let us 
welcome our second panel.
    Our first witness on panel two is Fredric Rolando. I love 
to say that name. Mr. Rolando has served as president of the 
National Association of Letter Carriers (NALC) since 2009. His 
own career as a letter carrier has spanned three decades dating 
back to 1978.
    Next we have John Hegarty. Mr. Hegarty is national 
president of the National Postal Mail Handlers Union (NPMHU), a 
position he has held since 2002.
    Our next witness is Bob Rapoza, and Mr. Rapoza has been the 
president of the National Association of Postmasters of the 
United States (NAPUS) since 2010, and he told me earlier today 
that he is going to turn that post over to his successor in the 
not too distant future. But it has just been a real pleasure 
working with you, sir.
    Next we have Douglas Holtz-Eakin. Mr. Holtz-Eakin has 
served as president of the American Action Forum. Prior to his 
current position, Mr. Holtz-Eakin served as Commissioner on the 
Financial Crisis Inquiry Commission and led the Congressional 
Budget Office (CBO) as its sixth Director from 2002 to 2005. 
Doug, it is great to see you. Welcome.
    And, finally, Dean Baker. Mr. Baker currently is the co-
director of the Center for Economic and Policy Research, a 
position he has held since 1999. Dr. Baker, good morning.
    Your entire statements will be made part of the record, and 
we will ask you to summarize as you see fit, and we are just 
glad you are here. Welcome to this conversation and the 
conversations that will follow. Thank you. Mr. Rolando.

    TESTIMONY OF FREDRIC V. ROLANDO,\1\ PRESIDENT, NATIONAL 
            ASSOCIATION OF LETTER CARRIERS, AFL-CIO

    Mr. Rolando. Thank you, Chairman Carper and Dr. Coburn and 
the rest of the Committee, for the opportunity to testify today 
on behalf of the 270,000 members of the NALC. My name is Fred 
Rolando. I am a letter carrier from Sarasota, Florida, 
currently serving as the president to the NALC.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Rolando appears in the Appendix 
on page 489.
---------------------------------------------------------------------------
    I would like to cut right to the chase because the 7 
minutes went down to 5, it looks like.
    Chairman Carper. Take 7.
    Mr. Rolando. While we appreciate very much your hard work 
in putting together S. 1486, we feel that the bill fails to 
permanently address the primary cause of the current financial 
crisis: The unaffordable mandate to prefund future retiree 
health costs.
    This unique mandate is responsible for 80 percent of the 
losses incurred since 2007 and 100 percent of this year's 
reported loss. Instead, the bill offers a 3-year moratorium and 
a new system of prefunding payments that will be greater after 
2015 than they are today, at which time the Postal Service will 
again default.
    That inadequate prefunding proposal, combined with the 
prospect of large postal hikes, the elimination of Saturday 
mail delivery and business door delivery, the phase-out of 
household door delivery, and the promotion of a morale-killing 
two-tier postal workforce would drive the Postal Service into a 
death spiral.
    Although these proposals are intended to protect taxpayers 
should the Postal Service fail, we feel the bill would instead 
lead to the failure of the Postal Service, ensuring that 
taxpayers are left on the hook, while damaging the mailing 
industry and the U.S. economy.
    As we meet today, the Postal Service is not in a free fall. 
Its pensions are nearly fully funded, even with the unfair 
accounting methods that are in place. We have amassed $49 
billion for retiree health that we have no access to. The Great 
Recession is over, and the Internet is creating new business 
for us, not just diverting it. The Postal Service has returned 
to operational profitability this year so far.
    Thanks to the hard work and the sacrifice of postal 
employees, who endured huge job cuts and painful concessions in 
the last round of collective bargaining, and to the surging 
package revenues, the Postal Service made $660 million in the 
most recent quarter--a profit that, of course, was wiped out by 
a $1.4 billion charge for the prefunding.
    This success has been made possible by our high-quality 
workforce and our successful system of labor relations, which 
has ensured quality service at the most affordable rates in the 
world for 40 years.
    The proposals to interfere with that system are based on 
misinformation, some of which was discussed earlier and brought 
up by Senator Tester. I would like to further clarify what the 
Postmaster and Senator Tester were talking about.
    Arbitrators are indeed required to consider the financial 
position of the Postal Service if it is raised by either party, 
which it has been in every interest arbitration since 
inception. Congress should reject these proposals along with 
drastic cuts to workers' compensation benefits and focus on the 
elephant in the room--the prefunding.
    Solutions to the Postal Service's prefunding problem can be 
found in reforms that are outlined in my written testimony.
    First, if measured accurately and fairly, the Postal 
Service's pensions, which, again, are nearly fully funded, 
would be massively overfunded. Unfortunately, the OPM continues 
to use outdated valuation methods to measure the Postal 
Service's assets. We welcome S. 1486's proposal to measure the 
postal accounts with postal-specific assumptions. But we urge 
the Committee to go further by implementing the PRC's 2010 
audit of the Postal Civil Service Retirement System account, 
done by the Segal Company, which uses modern private sector 
methods. The resulting pension surpluses could be used to pay 
down the Postal Service's debt and to fully fund its future 
retiree health benefits.
    Second, we feel the OPM should be directed to invest the 
funds of the retiree health fund in a way that responsibly 
maximizes its returns.
    Third, we feel that Congress should seek reforms in how 
FEHBP and its participating plans cover postal employees to 
reduce the costs of retiree health benefits and, therefore, 
lessen or even eliminate the unfunded liability.
    Together, we feel that these steps would allow us to focus 
on growth and innovation that would exploit our best assets, 
not destroy them.
    Mr. Chairman, at last week's hearing, you said, and I 
quote, ``I do not want to be back here in a few years 
discussing how we can dig ourselves out of yet another postal 
crisis.'' And I totally agree with you, but I am afraid this 
bill would guarantee that result as written.
    The legislation we need must make sensible reforms to 
reduce the unfunded liability of postal retiree health 
benefits. It must eliminate the Postal Service's debt with 
surplus pension funds and adopt reasonable pricing and product 
reforms without attacking our invaluable networks and 
productive workforce, which are both essential to our future 
growth.
    There are many good policy alternatives to austerity and 
downsizing. I urge you to consider the proposals that the NALC 
has put forward in our written testimony. We do pledge to work 
around the clock with all of you and all of the other major 
stakeholders to strengthen and to protect the United States 
Postal Service.
    I thank you for the opportunity to testify.
    Chairman Carper. Thanks very much, and thank you for your 
leadership and for your willingness to try to work with us and 
all the other stakeholders to get to a place where this Postal 
Service could be vibrant and just a real linchpin of our 
economy for a long time to come?
    Mr. Hegarty, please proceed.

 TESTIMONY OF JOHN F. HEGARTY,\1\ NATIONAL PRESIDENT, NATIONAL 
                   POSTAL MAIL HANDLERS UNION

    Mr. Hegarty. Thank you, Chairman Carper.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Hegarty appears in the Appendix 
on page 512.
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    Chairman Carper, Dr. Coburn, Members of the Committee, on 
behalf of the National Postal Mail Handlers Union, I appreciate 
the opportunity to testify here today to present our views.
    My union represents more than 45,000 craft employees, most 
of whom work in the Postal Service's large processing plants, 
such as the one that I come from in Springfield, Massachusetts. 
Processing is time sensitive and labor intensive. Further 
reductions in the number of processing facilities or in the 
hours worked by mail handlers will have a dire impact on the 
timely processing and delivery of all classes of mail. This is 
especially true for mail items that need prompt processing and 
delivery, such as priority, express, or first-class mail, and 
also medicines from pharmacy companies, newspapers, magazines, 
and advertisements.
    The Postal Service has faced some severe economic 
conditions since 2007. To the extent that the Postal Service 
has had to downsize because of the Great Recession of 2008 and 
the decline in mail volume, that downsizing has already 
occurred. Three hundred processing plants have been eliminated 
in the past 5 years, and the employee complement has been 
reduced by more than 300,000. Postal employees have already 
contributed to and sacrificed for the financial turnaround of 
the Postal Service. My members have had their wages frozen for 
the past 2 years and employee contributions have increased for 
both health insurance and retirement.
    About 20 percent of Postal employees, including more than 
5,000 members of my union, are working in non-career, part-time 
jobs at reduced pay rates. And thousands of employees have been 
involuntarily excessed or transferred to other work locations, 
often hundreds of miles away, and have had to uproot their 
homes and their families because of the closings and 
consolidations of the postal network.
    Last week, the Postmaster General testified that the Postal 
Service has reduced costs by $16 billion during the past few 
years. As a labor-intensive service industry, it should be 
clear that most of those savings have come from Postal 
employees.
    A fair estimate is that the recent bargaining agreements 
have contributed $12 billion to the Postal Service's expense 
reductions. The question to be asked, therefore, is: What have 
the other stakeholders contributed?
    First and foremost, it is now time for Congress to take 
action. Most of the losses announced by the Postal Service over 
the last few years have nothing to do with a failing business 
model or the obsolescence of the mail. In 2006, Congress 
mandated that the Postal Service prefund future retiree health 
benefits and do so 75 years into the future, but do so within 
10 years. We all know about the prefunding. The Postal Service 
now has $49 billion in that account.
    The facts are even brighter with regard to retirement. The 
Postal Service not only is fully funded in its retirement costs 
but, in fact, as we heard earlier, has overfunded their share 
of the Federal Employees Retirement System. Congress needs to 
act immediately to adjust the FERS account using postal-
specific data and return the overpayments.
    Nor should there be any severe restriction on how the 
Postal Service should use these monies. It should be allowed to 
pay down some of its debt and invest in programs and 
technologies to grow the business.
    With all respect, S. 1486 does not properly deal with both 
of these issues. On retiree health, the bill does not eliminate 
the remaining prefunding requirement but, rather, defers these 
unaffordable payments until 2016. Although the bill reduces the 
overall funding to 80 percent of total liability and allows for 
the payment of current retiree health premiums and the retiree 
health fund, the annual payments that would be required from 
the Postal Service starting in 2016 actually might exceed the 
obligations under the current law.
    With regard to pension, the draft bill unacceptably caps 
the FERS refund at only $6 billion. S. 1486 also fails to 
require an accurate calculation of the postal surplus 
attributable to the Civil Service Retirement System in the 
manner reasonably proposed by S. 316, which has been introduced 
with 31 Senate cosponsors.
    In one of its most unjustified provisions, S. 1486 would 
subject the continuation of Federal health and retirement 
benefits for Postal employees to future negotiation and 
arbitration, thereby threatening the future solvency and 
stability of the entire Federal Health Benefit Program and 
threatening to single out new Postal employees for grossly 
unfair treatment on the subject of employee benefits.
    This bill is also deficient on issues relating to the 
maintenance of service by the Postal Service. After a 2-year 
moratorium, S. 1486 would allow for the continued dismantling 
of the mail processing and delivery network that has always 
been the backbone of the Postal Service. Allowing the Postal 
Service to reduce service standards or eliminate days and 
points of service will only lead to lower quality and slower 
service. This would cause additional losses in business from 
mailers and the American public, which in turn will lead to 
deeper cuts and a continuing crisis.
    We also see no reason that the major mailers and the 
mailing public should not be asked to contribute their fair 
share to the future success of the Postal Service, perhaps by 
loosening the cap on rates to something more than the Consumer 
Price Index or by measuring inflation with another index that 
more realistically reflects the cost pressures faced by the 
Postal Service.
    As currently drafted, S. 1486 also contains a wholly 
unjustified reduction in workers' compensation benefits. The 
legislation would penalize injured workers with the worst 
injuries by forcing them into a retirement system that is based 
on their final salary, even though they were prohibited from 
earning increases in salary because of their on-the-job 
injuries. These workers also would be unable to save through 
the Thrift Savings Plan or earn Social Security credits while 
receiving workers' compensation. These provisions need to be 
removed.
    Finally, let me address the Postal Service's proposals to 
change its retirement and health insurance programs.
    With regard to retirement, there is no basis whatsoever for 
the proposal to leave the FERS system and adopt a separate 
defined contribution program. As already noted, retirement 
obligations are fully funded, if not overfunded, and do not 
impose any burden on postal finances.
    As for health insurance, the Postal Service continues to 
call publicly for a USPS-only health plan, but that proposal is 
inconsistent with my union's guiding principles on health care 
for our members and other postal employees.
    First, we insist that the Postal Service remain part of the 
Federal Employees Health Benefit Program to ensure the 
continued success of that program and to take advantage of the 
size and bargaining power of the Office of Personnel 
Management.
    Second, we insist that our members continue to have a wide 
range of choices in health insurance plans so that individual 
employees can choose which plan is best based on their family 
situation and other circumstances, just as all other Federal 
employees are allowed to do.
    Thank you again for allowing me to testify. I would be 
happy to answer any questions.
    Chairman Carper. Let the record show you used every second 
of your time except the last 2 seconds.
    Mr. Hegarty. I watched the clock.
    Chairman Carper. That is pretty good timing. All right. 
Thanks. Thanks so much.
    Mr. Rapoza, please proceed.

TESTIMONY OF ROBERT J. RAPOZA,\1\ NATIONAL PRESIDENT, NATIONAL 
        ASSOCIATION OF POSTMASTERS OF THE UNITED STATES

    Mr. Rapoza. Chairman Carper, Ranking Member Coburn, and 
Committee Members, thank you for inviting the National 
Association of Postmasters of the United States, to testify 
today. I will once again seek to provide constructive input. 
For the record, I am currently serving my 47th year as a Postal 
employee and very proud of it.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Rapoza appears in the Appendix on 
page 520.
---------------------------------------------------------------------------
    In my February 2013 testimony, I identified the core 
elements that Postmasters believe must be part of postal 
legislation, and they include: Promoting revenue generation 
through innovation and credible pricing; funding retiree health 
benefits and pensions fairly and realistically; and preserving 
universal service.
    Mr. Chairman, I concluded my February testimony with the 
admonition: ``The future of the Postal Service is in your 
hands.'' And you amended my remark by commenting: ``The future 
of the Postal Service is in our hands.'' I agreed. So, let me 
share with the Committee some of the sacrifices endured by 
Postmasters, which have contributed to Postal cost reductions.
    Postmasters have been denied merit-based salary adjustments 
for the past 3 years. Postmasters are not entitled to cost-of-
living-adjustments. Five thousand full-time Postmaster 
positions were eliminated over the past year. Another 4,500 
will be eliminated by September 2014, and more than 6,000 
Postmasters will shoulder the burden of overseeing multiple 
part-time post offices, with strained resources and limited 
training.
    It is also important to note that the non-career postal 
employees, known as Postmaster Replacements (PMRs), who will 
staff most of these part-time post offices, are not afforded 
employer-provided health benefits. However, we hope that the 
Committee can address the unmet health needs of the PMRs.
    Additionally, beginning this year, Postmasters will absorb 
an increased share of their FEHBP premiums. Even with these 
sacrifices, Postmasters continue to maintain a strong 
commitment to postal-reliant communities. So, Mr. Chairman, I 
think it is crucial to understand that Postmasters continue to 
do our part on behalf of the Postal Service and its future.
    Now let me summarize NAPUS positions on certain provisions 
of S. 1486. Section 301, provides more expeditious rate 
adjustments and pricing flexibility. Indeed, the hard CPI cap 
has proven to be injurious to postal operations and finances; 
moreover, the cap has not stemmed the tide of mail leaving the 
postal system. We believe that Section 302 of the legislation 
provides the Postal Service with essential latitude in 
developing innovative products and services and commend you for 
its inclusion.
    The Postal Inspector General called upon the Postal Service 
to leverage the Postmasters' community status by encouraging 
Postmasters to join local civic associations, providing fertile 
ground for marketing postal products and services. This should 
be included as part of an effective strategy to market the 
products and services. It could very well be a better 
investment than having a contract with a company like Faith 
Popcorn's Brain Reserve for an hourly rate between $91 and 
$836.
    While NAPUS could support some of the sections that address 
issues that moderate Postal Service employee benefit 
obligations, others raise red flags. Section 101 would provide 
a refund of up to $6 billion that the Postal Service has 
provided on behalf of its FERS beneficiaries. While we can 
agree to this provision, NAPUS believes that if the overpayment 
exceeds $6 billion, the higher amount should be reimbursed to 
the Postal Service.
    Section 102 would permit the Postal Service to deny newly 
hired Postal employees the opportunity to participate in FERS. 
It is unclear from the language how Postmasters would be 
treated under Section 102, since we do not collectively 
bargain. Moreover, it is unfair to put at risk the assurance 
and stability of retirement benefits for future Postmasters by 
eliminating statutory retirement protection.
    Section 103 would restructure the Postal Service's retiree 
health prefunding schedule to make required payments more 
manageable. While NAPUS believes that Congress should revisit 
the obligation in its entirety, amortizing 80 percent of the 
projected liability over a 40-year period, beginning in 2016, 
is a step in the right direction.
    Let me state for the record that I represent the only 
employee organization at this table that does not collectively 
bargain or sponsor an FEHBP health plan. Section 104 would 
subject employee health coverage, not just the Postal Service 
premium contribution, to collective bargaining. Postmasters 
currently have the opportunity to consult over benefits, not 
bargain over them.
    NAPUS is also concerned about the uncertainty of continued 
comprehensive health coverage for Postal retirees, particularly 
for those who are not Medicare eligible. It is also unclear how 
the voluntary separation of Medicare eligibles will impact 
Postal employees and retirees who are not Medicare eligible.
    In conclusion, NAPUS is concerned with the thrust of a 
number of the provisions that impact Postal employees' and 
retirees' statutory health and retirement benefits. 
Nevertheless, NAPUS continues to be willing to discuss the 
future of postal health benefits, so long as such coverage 
remains within FEHBP and the interests of our members are 
protected.
    We are also concerned about the decision to omit specific 
provisions that were included in S. 1789 that helped assure 
postal accessibility to all Americans. We are supportive of 
those provisions that make the retiree health prefunding 
schedule more manageable and provide the Postal Service with 
opportunities for innovation, encouraging governmental 
partnerships and enhanced pricing flexibility.
    I thank you, Mr. Chairman, and NAPUS is committed to 
working with you and your Committee and the Postal Service to 
cross that goal line that we talked about in February.
    Chairman Carper. Thank you. Thank you for that testimony, 
and thank you for 47 years of service to our country. You have 
been serving us through the Postal Service for longer than most 
people in this room have been alive, and we are aware of that 
and grateful for your service. Thank you.
    Dr. Holtz-Eakin, it is great to see you. Do you still enjoy 
testifying before Congress? I know you do not do it quite as 
much as you used to when you were CBO Director, but do you 
enjoy it?
    Mr. Holtz-Eakin. I both enjoy it and think it is an 
obligation. It is a kind of public service and something----
    Chairman Carper. You are good to do it. We appreciate it 
very much. Thank you.

   TESTIMONY OF DOUGLAS J. HOLTZ-EAKIN,\1\ PH.D., PRESIDENT, 
                     AMERICAN ACTION FORUM

    Mr. Holtz-Eakin. Mr. Chairman, Senator Coburn, and Senator 
Johnson, thank you for the chance to be here to discuss postal 
reform. This is an issue that I worked with this Committee on 
as far back as 2004 when I was at CBO and when I heard there 
were deep concerns about the financial outlook for the Postal 
system. And I can say that it is in far worse shape than we 
envisioned at that time, and I sympathize with the job you have 
in front of you. It is a quite difficult problem to solve.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Holtz-Eakin appears in the 
Appendix on page 535.
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    In light of the fact that only 10 years ago we missed it by 
a fair amount in the work we did, I guess I would emphasize 
something that came up in the first panel, which is the 
sensitivity of many of the numerical conclusions and, thus, the 
structure of the solution to assumptions. The discount rate got 
highlighted by Senator Johnson. I worry about the projected 
growth of health care costs in a lot of these actuarial 
assumptions because that historically has bounced around a lot, 
and it is at the heart of the Postal system's financial 
problems. Right now we are having a relatively modest growth in 
health care costs. That has happened before, and it has gone 
away. I believe there is reason to worry about upside growth in 
the health care costs, and that will make all these problems 
more difficult. I would design solutions that are as robust to 
that as you can, I would say, the only admonition I would bring 
to that.
    With respect to the rest, I think everyone would agree that 
the heart of the solutions are in changing the fundamentals, 
changes to the scope of activities, the volume of those 
activities, and what the Post Office can charge for them. That 
is going to improve the revenue outlook and, the real subject 
of today, what happens on the cost side, what are the quantity 
of facilities and equipment that have to be financed, at what 
capital cost, and in particular, how many workers, what is 
their productivity, and what is the compensation cost.
    Some things contemplated in the bill will change those. New 
types of retirement plans that are not FERS could change 
lifetime compensation costs, fundamentally alter the outlook 
over the course of the future. Those I think are to be focused 
on. Some of the rest, as has been mentioned, amount to shifts 
in costs over time or across people, and how you think about 
them I think really comes down to how you think about the Post 
Office as either part of the government or as a stand-alone 
entity in the two extremes.
    If it is part of a government pool, insurance pools for 
retirement or health inherently involve redistribution from 
person to person or agency to agency. That is part and parcel 
of insurance. If so, then those shifts are something everyone 
should accept and not worry about. They are part of financing a 
government pool of benefits.
    If you think of it as a stand-alone entity, then, in fact, 
in FERS perhaps there has been overpayment. That would be 
refunded and not replicated in the future. You might think 
differently about the shifts from Medicare and FEHBP. So that 
is really a decision the Committee has to make about what is 
the vision of the future of this entity. But some of them, I 
think, are--there are two other aspects that I think are 
important. One is sometimes you change the fundamentals. I 
would be concerned that if you shift more people to Medicare, 
which has a history of high volume and non-managed activities, 
you will actually change the fundamentals. You will spend more. 
It is not just who picks up the bill and which accounting it 
goes through. And I would pay attention, again, to 
fundamentals. You do not want costs going up. You want them 
going down.
    And the second is because the post office is such a large 
fraction of, in particular FEHBP, a system that has often been 
held up as a model for future reforms, that you do not do back-
door FEHBP reform in this bill, that you be careful to make 
sure that the system itself is either reformed in its own 
right, where I think there is some case to be made, but at 
least not damaged by the postal reform.
    I am happy to be here today. I look forward to any help I 
can offer.
    Chairman Carper. Good. Thanks so much for that testimony 
and for joining us as well.
    Dr. Baker, welcome. Good to see you.

  TESTIMONY OF DEAN BAKER,\1\ PH.D., CO-DIRECTOR, CENTER FOR 
                  ECONOMIC AND POLICY RESEARCH

    Mr. Baker. Thank you, Chairman Carper and Ranking Member 
Coburn, for inviting me to testify. I appreciate the 
opportunity to address the Committee.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Baker appears in the Appendix on 
page 540.
---------------------------------------------------------------------------
    I want to make two main points, which, of course, have come 
out, I am sure, in the earlier panel, which I am sorry I 
missed. It was an overcrowded room. I would have been here 
otherwise, but I could not find a place to comfortably situate 
myself. But I would like to make, first off, the point that the 
pace of buildup in the retiree health care fund is certainly 
extraordinary and, as has been pointed out, is much of the 
source of the losses that the Postal Service has incurred in 
the last decade.
    The second point is that the treatment of the Postal 
Service continues to be very asymmetric with private sector 
firms, and if the goal of Congress is to try to treat the 
Postal Service in the same way that we would expect a private 
sector firm to operate, we are still very far from that, and 
particularly what I want to emphasize is the treatment of the 
retiree benefit funds.
    On the first point, the Postal Accountability and 
Enhancement Act passed in 2006, which required a very ambitious 
pace of prefunding for the retiree health benefit system. I 
understand the intention of Congress. The goal, of course, was 
an admirable one: To ensure that the taxpayer was not stuck 
with the bill in the event that there was a sudden crisis and, 
the Postal Service would have to suddenly make good on these 
obligations. And prefunding, arguably, is a reasonable goal.
    It is worth noting that this is generally not done in the 
private sector. We are seeing firms rapidly move away from 
having retiree health benefits, but in those that do, you will 
find very few, if any, that have full prefunding. So this is 
extraordinary, and it was also an extraordinary decision to go 
ahead and do that over a 10-year period. The numbers speak for 
themselves. We are talking about a rate of prefunding on the 
order $5.5 billion a year, which is about 8 percent of the 
Postal Service's revenue. So that is a very heavy burden to 
have imposed on any business, and certainly the Postal Service 
had a very difficult time dealing with that.
    Now, that would have been true even in normal times. Of 
course, in 2006, Congress did not anticipate the economic 
collapse that we subsequently saw 2 years later. Very few 
people did. And it is very unlikely, had Congress anticipated 
the sort of downturn that we subsequently saw and still find 
ourselves in today, that they would have made a proposal of 
putting this sort of extra burden on the Postal Service.
    Now, in addition to requiring a very high rate of 
prefunding, a very rapid rate of accumulation, I should say, I 
should also point out that the assumptions involved here are in 
many ways very pessimistic. Doug had raised the issue about 
health care costs, and, again, great uncertainty on that. But I 
look at those assumptions and see them as very pessimistic: 7 
percent annual growth in health care costs. I would just point 
out that we have the recent experience of health care costs 
growing much more slowly than that. And, again, none of us know 
exactly what will happen. But it is worth noting that the 
Center for Medicare & Medicaid Services projects 5 percent per 
person health care cost growth over the next decade. So in this 
sense, we are talking about considerably more rapid growth, 
which has a huge effect when compounded over the projection 
period. So we would be very far toward meeting that 80-percent 
target if, in fact, that 5-percent rate persists over the 
projection period. Again, I am not saying that it will. I am 
simply saying that it is a reasonable possibility, and we are 
imposing a very heavy burden on the Postal Service that may not 
be necessary.
    A second point, again, I am sure this came out, but I just 
think it is striking. I had occasion to be in one of the 
mediation hearings back in 2011, and I looked at the Postal 
Service's projection at that time. They were projecting revenue 
falling to just $63 billion as of 2013 and continuing to 
decline over the rest of the decade, so it would be about $59 
billion by the end of the decade. We are now looking at revenue 
of $66 billion. So, in fact, there has been really a quite 
remarkable turnaround. We are looking at a system that does 
look as though it is quite viable apart from these retiree 
obligations. So it is not as though we have an ailing system on 
its last legs. It looks very much as though we have a system 
that, in principle, is viable but is suffering very much from, 
I would say at least, an excessive burden in requiring it to 
prefund at a very rapid rate.
    The second point I want to make was that the treatment of 
retiree funds is certainly asymmetrical with the private 
sector. Again, there are many ways we could talk about the 
Postal Service, certainly its lack of flexibility and pricing 
and product offerings that put it at a disadvantage in many 
ways relative to the private sector. But it is really quite 
striking if you look at its prefunding requirements. 
Specifically what I am simply saying here is its requirement 
that it invest its funds exclusively in government bonds. 
Again, I understand the rationale for that. Obviously if they 
were to invest in other assets, it would involve an increase in 
the deficit as ordinarily reported. But, nonetheless, that is a 
very real handicap. I just did some quick calculations, very 
simple calculations. If you simply assume that the funds--and 
here I am talking about all three funds: CSRS, FERS, and the 
Retiree Health Benefit (RHB) Fund. If all three had been 
invested in a diversified portfolio offering a 7-percent 
nominal rate of return, the difference between that and 
investing in government bonds would be about $6.6 billion in 
the current year. If we assumed an 8-percent nominal return, 
slightly higher but still consistent with what is assumed in 
many pension funds, the difference would be about $9.9 billion. 
So this is very large relative to the operating income of the 
Postal Service, and it would make a very big difference.
    Now, again, I understand it would not be easy to talk about 
switching, particularly in the case of CSRS, which is probably 
just about impossible to switch into a diverse portfolio, but 
it is something that I think Congress has to take into account 
if there is an expectation that the Postal Service is going to 
compete with private sector competitors who do, if we look at 
UPS, in fact invest a pension fund in a diversified range of 
assets.
    So, in conclusion, what I would just say is that I think 
the Postal Service is clearly a viable, ongoing entity, and I 
understand it is the intention of the Committee and the 
intention of Congress to keep it as such. And I think it has to 
be mindful of the handicaps that it has placed, obviously 
unintentionally, with what I would consider an excessive 
prefunding requirement with its health care fund.
    Thank you for listening.
    Chairman Carper. Thank you all. Taken together, that is 
very constructive and I think helpful testimony, and we welcome 
every bit of it.
    Dr. Coburn and I do not agree on every single thing, but 
one of the things I think we are pretty much in lockstep on is 
the need to reduce our Nation's budget deficit. And I focus on 
three areas, as I said earlier on, and one of those is we need 
entitlement reform that saves these programs, saves them for 
the next generation, saves money, and also does not savage old 
people or poor people. That is No. 1.
    No. 2, we need tax reform to generate some revenues to go 
toward deficit reduction.
    And, No. 3, we need to look at everything we do, everything 
we do in the Federal Government, and ask this question: How do 
we get a better result for less money in literally everything 
that we do? And the same is true here with respect to health 
care coverage for Postal employees and for Federal employees.
    When I was Governor, they let me be Chairman of the 
National Governors Association (NGA) for a while, and after 
that they let me be the Chairman in the National Governors 
Association of something called a ``Clearinghouse for Good 
Ideas.'' We had a Center for Best Practices, and all the 
States, all the Governors, would share ideas that worked with 
other Governors. And we used to say there are 50 States, there 
are 50 laboratories of democracy, let them go forward and 
experiment. And then the rest of us will learn for better or 
for worse from those experiments.
    Do we have the opportunity here, if somehow our friends 
from organized labor, from the Postmaster, from Postal 
management, if they are able to come up with a way to get, if 
you will, better health care coverage for a little bit less 
money could that not be like one of 50 laboratories to 
experiment, but an experiment? Could it be a good, viable 
experiment for us as we consider everybody else that is in 
FEHBP? That is my question. Let me just direct that first to 
Dr. Holtz-Eakin and then to Dr. Baker. Could this be a good 
opportunity to experiment so we might learn for the rest of the 
Federal Government, how to get better health care coverage for 
less money or the same amount of money?
    Mr. Holtz-Eakin. I certainly think so. There is no reason 
to believe that when FEHBP was invented 40-odd years ago that 
Congress got it right by legislating for specific designs, with 
all due respect. Some things have changed a little bit. So, 
yes, there is a good case to be made for reforming FEHBP, and 
there is a good case to be made that this is a place where you 
could try some things out. No doubt about that.
    Chairman Carper. Thank you. Dr. Baker.
    Mr. Baker. Certainly, I would just mention one--well, two 
points I would make.
    First off, I would like it to be voluntary on the part of--
because, in principle, we want something that would both 
benefit the beneficiaries and save the government money.
    But, second, in terms of, nothing is ever simple. Something 
that can be done, we do have a health care system just north of 
us in a country called Canada where costs are about half as 
large, I guess about 60 percent as large as the United States', 
which should start raising an obvious point that, if we could 
get people, say, in a neighboring State, in Washington State, 
in Maine--we have lots of areas of the United States that are 
close to Canada, Michigan where I spent many years. If we could 
arrange for a situation where people could buy into the health 
care systems in Canada and split the savings with the U.S. 
Government, that could be very much a win-win. And, again, if 
you gave people the option, they are not forced into that, if 
someone in Michigan opts to take advantage of the health care 
system across the river in Windsor, that could be a win-win for 
everyone involved.
    Chairman Carper. All right. Thank you.
    I am a glass-half-full guy, and I am a glass-half-full with 
respect to better containing the growth of health care costs in 
this country going forward. A lot of people say, well, it is 
Obamacare, the reason why we have seen a slowing of health care 
costs. It is the Affordable Care Act. I think it has helped, 
but it is not the only thing. We are doing a lot of smarter 
things in this country in delivering health care costs: 
electronic health records, federally qualified community health 
centers where we reduce the number of people who show up in 
emergency rooms sick, really sick, get hospitalized. They now 
go to their community health center; get better access to 
prescription medicines; the idea of coordinating delivery of 
health care and providing medical homes; the idea of giving 
everybody in every State in the country the opportunity to 
participate in a large purchasing pool, an exchange or 
marketplace for health care. All those things that are new--and 
some are not new ideas, but they are actually being 
implemented--I think they have the potential for really helping 
us continue to rein in the growth of health care costs. And 
that 5 percent that I think you cited, Dr. Baker, I think that 
is not an unrealistic number.
    I want to come back to something, Fred, that you said, and 
I tried to write down part of it. You said, ``Congress should 
focus on the elephant in the room: The prefunding of retiree 
health care liability,'' or words to that effect. Tom Coburn 
and I have really tried to do that. We really have tried to do 
that. And if you look back at what we did in 2006, the only way 
we got President Bush to sign the bill was to agree to this 
unrealistic, overly conservative approach to prefunding retiree 
health care. At the time I did not think it was a good idea. I 
am not sure that Senator Collins, thought it was a good idea. 
That was the price for admission. That was the price for 
getting the bill signed into law.
    And what we have done in our legislation--let me just be 
real clear. What we have done in our legislation--the $40 
billion that has been prepaid to meet this retiree health 
benefit? We provide to the Postal Service the ability to access 
that money to pay for retiree health care costs. And we do not 
say you have to meet the rest of the liability. We do not say 
you even have to amortize the liability, the remaining 
liability for retiree health care costs over 40 years 100 
percent. We say 40 years, 80 percent.
    But I will tell you this: It would be interesting if we 
could actually look at every county, city, and State in this 
country and see how they propose to amortize their liability 
for their retiree health care. My bet is that nobody has an 
approach that is even that fiscally responsible, that 
responsible.
    So we really have tried hard on this. We have really tried 
hard on this, and I am disappointed to hear you suggest that we 
have not.
    Let me just go to Mr. Hegarty and Mr. Rapoza. Your response 
to that, if you will. Have we been as delinquent on this as Mr. 
Rolando has suggested? Then I will ask our other two witnesses 
as well. We have tried to be responsible.
    Mr. Hegarty. Yes, well, I thought you were directing the 
question to Mr. Rolando----
    Chairman Carper. No. To you.
    Mr. Hegarty [continuing]. But that is fine. No, we 
appreciate your efforts on this. Do not take it that we are 
saying that you have not done anything on it. We just have a 
difference of opinion on the funding schedule going forward. 
Some facts and figures out there would suggest that 2016, 2017, 
2018, and farther out, the liability will actually be more per 
year than it is now. In other words, now it is $5.5 billion. In 
2018, it might be $5.8 billion because it has been re-
amortized.
    I appreciate the 80 percent. I appreciate the 40 years. I 
think it is a step in the right direction. But as you heard the 
Postmaster General testify earlier, we are trying to come up 
with a plan--and we are not there yet so I cannot give you too 
many details, but he alluded to it--where we can save the 
Postal Service the money on health care and eliminate the 
prefunding going forward.
    Now, it has been said that we are going to be overloading 
Medicare or adding costs to Medicare. I have been paying into 
Medicare my whole adult working life. When I retire, I want the 
benefit of those payments. So that is a promise that the 
government made to me: If you pay your Medicare taxes, you will 
have Medicare when you retire. I do not see that as being 
unreasonable that Postal employees should--the 23 percent who 
are not currently taking advantage of Medicare, that they 
should not be encouraged to take advantage of Medicare, Part B.
    Chairman Carper. I think it is fair to say Dr. Coburn and I 
think it is an inequity. What we have right now is an inequity. 
Folks pay into Medicare, but the Postal Service, their 
employees, retirees, do not have the full benefit from that.
    Mr. Rapoza--and I know I am over my time. Let me just go to 
you, please.
    Mr. Rapoza. NAPUS looks forward to working with the 
Committee. We worked with you on S. 1789, and we look forward 
to working on S. 1486. And when we testified on February 13, I 
think you mentioned that we were in a red zone on the 20-yard 
line.
    Chairman Carper. Yes.
    Mr. Rapoza. I did not know we had 80 yards to go. I thought 
we just had that 20 to go. I guess we were on the wrong side of 
the 50-yard line. But we are kind of frustrated that it keeps 
going up. But we appreciate all you are doing because you have 
a lot of other things on your plate. And I think this morning 
was the first time I have seen almost the full Committee here 
sitting down. So there is a lot of focus on this, and we 
appreciate what you are doing.
    I do think that a fresh look at the liability is warranted 
and the members that I represent are concerned on the Medicare 
issue also. We are concerned by the unknown. But the Postal 
Service has been very open with us. We have forwarded them 19 
questions. They have returned answers. So we are communicating 
with the Postal Service. The biggest fear is trying to get to 
the unknown.
    For us, the other fear is not having power to negotiate. We 
consult, yet we do not have collective bargaining. So where do 
we fit in on this? And that is the part that we are willing to 
work with.
    Chairman Carper. Just a brief comment from Dr. Holtz-Eakin 
and Dr. Baker, and then I will yield to Tom.
    Mr. Holtz-Eakin. You cannot separate the prefunding from 
the rest of the issues. Those are costs that are going to be 
paid now, or they will be paid later, paid out in a schedule 
that you laid out in the legislation. But by spreading them out 
longer, you are buying time to fix the business fundamentals, 
and it will only be a good idea if you fix the business 
fundamentals and never forget that.
    Chairman Carper. Thank you.
    Dr. Baker, just briefly.
    Mr. Baker. Yes, just quickly I would say that as I am sure 
you recognize, this is a very serious burden if you are to take 
any business, even a thriving one like Apple or Amazon, and 
say, OK, we made an accounting mistake, you have to pay 8 
percent of your revenue into X fund, that would be a huge 
burden that would jeopardize even their viability. So I think 
we have to recognize that.
    Chairman Carper. Good. Thanks. Tom.
    Senator Coburn. Yes, I would just note for the record, 
according to Congressional Research Service (CRS), 25 percent 
of private companies prefund their retirement health care. So 
the fact we say that not very many people do that is 
inaccurate. Twenty-five percent do. Some are through the 
Voluntary Employee Beneficiary Association (VEBAs), some are 
not. But, in fact, 25 percent of private companies.
    The second point that I would make, private companies have 
to list their unfunded liabilities for their retiree health 
care as a liability on their balance sheet. We have an 
organization, the Postal Service, that has twice as many 
liabilities as it has assets right now. And that is without 
listing retiree health benefits in it.
    So the point is it goes down to this: We have an obligation 
to keep our word to the retirees of the Postal Service, and I 
take what Dr. Holtz-Eakin said. Nobody can predict what the 
future health care costs are. But the trend, until we have a 
truly transparent, competitive market in health care, which we 
do not have today--we did not have it before the Affordable 
Care Act, and we do not have it today. Until we have 
transparency and true markets on health care, where individuals 
make the best choice for them and their family, we better err 
on the conservative side on the cost pressures on health care.
    I am absolutely committed to the workforce of the Post 
Office to make sure that every commitment that has been made to 
their employees on retiree health benefits is kept. And what we 
have to do is find the sweet spot that you all are agreeable 
with that still meets the reality test.
    I have one other question. Your comments, Mr. Rolando, on 
the Federal Employees Compensation Act, just to remind you, 
those who are permanently totally disabled and unable to work 
under this bill would be exempt from this section. They are 
grandfathered. They are totally grandfathered. We have numerous 
people over 90 years of age collecting workers' compensation 
from the Post Office rather than their retirement. And I 
understand the differential there, that because they were 
injured, they could not go back and earn more through time. I 
am not fighting that. I am actually open to allowing people on 
that to continue to participate in FERS. I do not have any 
problem with that. But we still have to reform the system 
because it is totally unaffordable and we have gone from $7 
billion to $17 billion in 6 years in terms of--so what we have 
to do is look at every aspect, and that is what Senator Carper 
and I have tried to do with this bill. And we knew we were 
going to get tons of criticism. That is why we are having this 
hearing. We want to get the feedback.
    I want to assure you that our commitment is firm, that one 
is we get pricing capability at the Post Office. Now, we may 
not win it the way we would like to do it right now, which we 
think is important. It needs to be market based. It needs to be 
sweet spot based. You do not want to run away your business. 
But you also do not want to subsidize business to a degree 
greater than it has to be subsidized to keep it. And we have to 
keep our commitments in terms of the promises made to retired 
Postal workers.
    And then we have to have the regular negotiations that you 
all are good at to get the best benefit you can given the 
political realities and the financial realities of the Post 
Office. So that is what we are trying to do.
    Mr. Rolando. May I respond?
    Senator Coburn. Sure.
    Mr. Rolando. On the workers' compensation, I agree with 
you, I think it is important that any workers' compensation 
program ensures that a worker, because they are injured is no 
better off or no worse off as a result of the benefits that 
they are able to get rather than retirement. I think the issue 
with the provision is that the data and the research that was 
done by the Department of Labor was not done in FERS employees. 
It was done on Civil Service employees, who are pretty much 
gone. I mean, we have less than 10 percent Civil Service. There 
was no data run on the FERS employees.
    If you compare FERS employees to the benefits, they are 
already worse off with the workers' compensation benefits, and 
this bill would take them even further down. But as far as the 
equality you are talking about, we are all for that.
    Senator Coburn. But I would also tell you, in the private 
sector nobody stays on workers' comp in the private sector at 
retirement age. They go to the retirement.
    Mr. Rolando. Sure, and we agree in equity that would be 
great if we had a bill that did just that with no loss, no 
gain.
    Could I also comment on what you said, if you have time, on 
the prefunding? Because we mentioned 25 percent of the 
companies--and I agree----
    Senator Coburn. That is not my data. That is Congressional 
Research Data.
    Mr. Rolando. Sure. I think it is correct. We are all for 
the prefunding. We just think there are maybe like four ways 
you do it. Either you have beaucoup profits and you can just do 
it, which would be great at 100 percent, 75 years in the 
future. That would be wonderful.
    Or as I mentioned, if we had some surpluses, if they were 
recognized, all those things we talked about, if you could do 
it that way, that would be wonderful.
    A third way, as you mentioned, the corporate practice is 25 
percent of the companies that do it, but they do it at an 
average rate of 35 percent, not 100 percent. If we mirrored 
that.
    The fourth way would be to find a way to bring the 
liability down, which we have all spoken to, to some extent. Of 
course, the NALC would be all for figuring out a way to do that 
so it does not, of course, compromise the networks and the 
workers and so forth. There are ways to do that.
    Senator Coburn. Let me ask you a question. Would you all be 
interested at all from a bargaining standpoint in having a VEBA 
and you run your own health care?
    Mr. Rolando. That is a tough question.
    Senator Coburn. Well, would you think about it and reply to 
me?
    Mr. Rolando. Well, at this point----
    Senator Coburn. I do not want to put you on the spot.
    Mr. Rolando. At this point, what we are really looking at 
and we are in discussions with the Postal Service, the other 
unions, the mailers, we are all looking at all these Medicare 
provisions and how that would work as part of a more 
comprehensive reform that includes the things that really need 
to be done without compromising the networks and the workforce. 
We have been in pretty deep discussions about that.
    Senator Coburn. So it is important to put back into the 
record. If you include employee health benefits, the benefit 
package for the average employee of the Postal Service, 
excluding management, is $35,000 a year. That is the benefit 
package. That is the cost of the benefit package. And that is 
3\1/2\ times what the average private sector benefit package 
is.
    So those things need to be put into perspective in terms of 
if we are going to be competitive. And I would make this point, 
and I think Dr. Holtz-Eakin has. It is not just the Postal 
Service that is wrestling with health care costs, right? I 
mean, the charade we have seen this week is about health care 
costs ultimately and how do we stay competitive as a Nation. 
Your comments about up north, I would differ in terms of the 
same health outcomes, but there is no question it is lower. 
Plus we have six studies that show $1 out of every $3 we spend 
in this country does not help anybody in health care, and I 
think that is market force related, because we all think 
somebody else is paying for our health care. And anything we 
can do, you all can negotiate with the Postal Service, that 
gives you the same health care at a lower cost ultimately 
benefits you not just in your health care but benefits you in 
terms of the future of the Postal Service. And that is why I 
think some of the ideas that the Postal Service and the unions 
are working on are going to be very beneficial. And I would 
also say you ought to share in some of the benefits of that.
    And so we have a lot of things we need to do. I will submit 
to each of you some questions for the record, if you would get 
back with me on those.
    And I have never held a job longer than about 9 years, Mr. 
Postmaster, so I would congratulate you again on the number of 
years you have done.
    Chairman Carper. But he has always had a good job.
    All right. Senator Johnson.
    Senator Johnson. Thank you, Mr. Chairman.
    Chairman Carper. And I want to say again--I always say this 
when he comes. Along with Dr. Coburn, he is a faithful attender 
of these hearings, and we are deeply grateful.
    Senator Johnson. Well, I learn a lot, and these are 
important issues.
    Let me just chime in on my own opinion in terms of what is 
happening with the moderation in the rise of health care costs, 
having been purchasing health care for the last 31 years. I 
think the increase in deductibles over time, the advent of the 
Health Savings Account (HSAs) have actually begun reconnecting 
the consumer to the product, the payment to the product. I 
think that has gone a long way toward just starting to restrain 
costs, which was one of my big problems with the health care 
law. And then just the poor economy, that always depresses 
prices across the board. So I think those are the two primary 
factors.
    Mr. Rapoza, there are a couple statements I just need to 
talk to you about. You talked about misinformation, outdated 
models in terms of calculating the liabilities. I personally 
think the elephant in the room here really is the GAO testimony 
that shows on their Table 1 an unfunded liability in total of 
$96 billion, basically $99 billion less a $3 billion surplus in 
FERS, which is what we are all talking about this prefunding.
    Mr. Rapoza, you talked about being concerned. If I were a 
Postal worker, I would be concerned about that $96 billion 
unfunded liability. What am I missing here?
    Mr. Rolando. Were you referring to pensions or retiree 
health care?
    Senator Johnson. I am talking about the entire liability 
having to do with pensions and health care. Again, I know you 
can pick and choose the little individual section, but if I am 
a retired Postal worker, I would be kind of concerned about the 
overall package that I have been promised and the financial 
stability of the Postal system to make those payments?
    Mr. Rolando. As a Postal worker, if I am Civil Service, I 
am pretty comfortable because I am 100 percent funded for my 
retirement. If I am a FERS enrollment, I am pretty comfortable 
because we are 100 percent or overfunded in that retirement 
system.
    As far as my retiree health care, the Postal Service has 
been making the premiums for 50-some years, continued to do so, 
and they have $50 billion in account to continue to do so.
    Senator Johnson. So do you just reject that $96 billion 
unfunded liability in terms of----
    Mr. Rolando. No. I am proud to work for a company that is 
more funded than any other company in the country for their 
retiree health benefits.
    Mr. Hegarty. Senator Johnson, we do not have the tables in 
front of us, so I have not seen the $96 billion liability. But 
we would be happy----
    Senator Johnson. OK. I would really suggest you take a look 
at that GAO report.
    Mr. Hegarty. Yes.
    Senator Johnson. That is certainly what would concern me.
    Mr. Rolando, you also talked about that the losses are 
clearly--they have nothing to do with the lost revenue, but in 
2007 revenue was about $75 billion, now it is about $65 
billion, is what I get. That is a $10 billion drop. Whereas, 
operating expenses have been reduced, but it is $3 billion. So 
operating expenses, 80 percent of which are labor, I mean, 
isn't that the primary cost driver, and isn't really what the 
Post Office is struggling with is a different, dramatically 
changed business model where we are losing paper mail and they 
are having to grapple with that problem?
    Mr. Rolando. Well, that is a two-part question. I think 
that the percentage might be correct, but I do not believe the 
Postal Service is struggling with it at all. We are very labor 
intensive. We go to every house 6 days a week all over the 
country with additional addresses added every year. So, of 
course, a large percent of your costs are going to be labor. 
The percentage used to be in the mid-80s. It is now in the high 
70s as a result of----
    Senator Johnson. But then, again, isn't that the main 
driver in terms of the financial situation of--again, I think 
it is----
    Mr. Rolando. Sure.
    Senator Johnson [continuing]. Misleading to keep banging on 
this prefunding of a liability that is, let us face it, pretty 
sensitive to just the assumptions, and that surplus can go away 
in a second based on the changing assumptions of those models.
    Mr. Rolando. It is one of the----
    Senator Johnson. Also, by the way, what is the incorrect 
calculation on those? I mean, you are saying it is an outdated 
model. How should it be calculated? What is wrong with the 
model in terms of the calculation of the liability?
    Mr. Rolando. Your first question, I believe the labor is a 
positive factor because of the productivity gains.
    The second question, the model you speak of, were you 
talking about the workers' compensation model?
    Senator Johnson. You said that the calculation of the 
liability is based on outdated models, and they have to 
modernize their calculation models.
    Mr. Rolando. Oh, OK. You are referring to the Segal and the 
Hay reports with regard to the actuarial reports of the----
    Senator Johnson. Yes, whatever you were talking about.
    Mr. Rolando [continuing]. Pensions? OK, yes, that is what 
we were talking about. Again, I am not an actuary, but the 
independent reports indicated that if you use--and the GAO 
themselves said all of those methods were acceptable methods. 
It was just a matter of a policy decision by the Congress.
    Senator Johnson. Dr. Holtz-Eakin, could you chime in on 
that?
    Mr. Holtz-Eakin. I have not seen the Segal report. I am 
happy to look at it and get back to you.
    Senator Johnson. OK. I mean, do you question the GAO 
calculations in terms of unfunded liabilities, $96 billion?
    Mr. Holtz-Eakin. No, not fundamentally.
    Senator Coburn. Let me just caution you. The Segal report 
has revisionist history in it in terms of what the deal was in 
1983 when all the assets were transferred to the Post Office 
and the obligations were assumed by the Postal Service. So they 
have totally discounted that in this analysis, which you cannot 
discount.
    Mr. Baker. If I can comment on the methodological issue, I 
think the question is whether you take life expectancy specific 
to the population, to the Postal workers, and I believe those 
are somewhat less than the overall population. I think that is 
a methodological issue.
    Senator Johnson. Again, to me we are quibbling with details 
when you are talking about $96 billion--what difference would 
it make? I mean, would it be $93 billion versus $99 billion? We 
are probably talking about that order of magnitude in terms of 
the differences based on the calculation, wouldn't we? Nothing 
significant?
    Mr. Holtz-Eakin. Oh, I do not know. I would take a look. I 
mean, as we know, health care costs have grown faster than any 
discount rate that is out there in the market for quite a while 
now, and so when you assume they moderate and how fast they 
moderate drives the calculation.
    Senator Johnson. Let me talk a little bit about just 
average cost of benefits compensation. A couple years ago, when 
I was running--I saw a study that showed that the average cost 
for Federal workers was a little over $120,000, average cost, 
total cost--that is pay and benefit--of the private sector was 
about $65,000. And you can see just in terms of benefits, 
$35,000 for a postal worker, $10,000 private sector.
    Dr. Holtz-Eakin, can you just comment? How did it get that 
outsized?
    Mr. Holtz-Eakin. I do not have a complete history of the 
Postal Service. I guess this is why I----
    Senator Johnson. I am just saying Federal workers in 
general as head of the CBO, just your comment on that.
    Mr. Holtz-Eakin. They are not comparable. Look at the Post 
Office. It is not a private sector entity. If so, it would be 
bankrupt. That is what the accounting tells you. It has got a 
government-provided monopoly for particular lines of business. 
Monopolies do things very differently, and often they pad their 
payrolls on top of everything else. We have seen a lot of that. 
It is true across the government.
    So that is why the focus going forward has to be not the 
timing of this agreed-upon decision to honor the retiree health 
costs. It is about the business fundamentals, what those labor 
costs as a labor-intensive industry and what are the lines of 
business they are going to serve. That is it. If they do not 
fix that, you do not fix things.
    Senator Johnson. So coming from the private sector as an 
accountant, I always had to benchmark my costs, whatever they 
were, whether it was material costs versus labor costs versus 
benefit costs, against people I compete with. And that is 
really what you are talking about in terms of the fundamentals, 
we have to benchmark what we are paying in total Postal workers 
versus what the private sector--who they will have to compete 
against, whether it is FedEx, whether it is UPS. We are going 
to have to get those costs in line, and primarily with the 
Postal Service it is labor costs that have to get in line with 
the private sector over time.
    Mr. Holtz-Eakin. And the places we have seen the government 
struggle the most are those places where new competition has 
arisen to things that were previously exclusively government 
monopolies. And that is true here.
    Senator Johnson. OK. Well, thank you. My time has expired.
    Thank you, Mr. Chairman.
    Chairman Carper. Dr. Coburn.
    Senator Coburn. I just had one more, and I wanted to hear 
your response to one of the comments Dr. Baker made about 
getting a better return on the funds that we have today. For 
example, when we are investing in T-bills instead of investing 
in a complex portfolio that is balanced against risk, what 
would you all think, if you hear a proposal like that where we 
actually got more bang for our buck on the invested dollars, 
what would be your position with that?
    Mr. Rolando. Well, I would not want to put it in timbers or 
something like that, but I think----
    Senator Coburn. That is OK. We do not carve in trees in 
Oklahoma because we do not have that many. [Laughter.]
    Mr. Rolando. I do not think it would be a bad idea to look 
at the different funds in the Thrift Savings Plan where Postal 
employees already have their life savings and, look at a little 
better return there, something safe that has some precedent.
    Senator Coburn. OK. Mr. Hegarty.
    Mr. Hegarty. I agree with President Rolando. I think the 
Thrift Savings Life Cycle Funds, whether you look at the L-40 
or the L-50, the risk gets spread out over time, the returns 
would be significantly more than T-bills. I agree with Fred.
    Senator Coburn. Dr. Holtz-Eakin, what do you think about 
that?
    Mr. Holtz-Eakin. I am far more cautious. We have been 
through this war with Social Security, and this line of 
reasoning is the one that says that, No. 1, the Postal Service 
gets the upside, taxpayers gets the downside if they do not 
perform. And, No. 2, if this logic really worked, we should 
issue, say, $16 trillion more in Treasuries, invest it in the 
stock market, pocket the difference as the Federal Government.
    Senator Coburn. OK. Thank you.
    Senator Johnson. Could I just chime in on that?
    Senator Coburn. Sure.
    Senator Johnson. Also a couple years ago, as I was running, 
I did my own little model. I am an accountant. I do spread 
sheets. And I just took a look at the Social Security surplus. 
Had we invested that--and I realize these did not exist back 
then, but a Dow Jones index fund, totally exclusive of 
dividends, had we done that--and this is a couple years ago, it 
would be a fair better result today--we would have $5 trillion 
in a trust fund that was a real asset to the Federal 
Government. A real assets versus $2.6 trillion trust fund 
invested in Treasury bonds that has zero value to the Federal 
Government because they offset liabilities in the Treasury.
    So can we do it at this point in time? At some point in 
time you are better off starting to do the right thing as 
opposed to doing the wrong thing.
    Chairman Carper. Gentlemen, it has been a real good 
hearing, and the first panel was very helpful. The second 
panel, the Postmaster General, you and Ron, I thank you for 
staying to hear this second panel. They all did a real good 
job, and I thank my colleagues for being here as well.
    I want to just give you each a chance to make a closing 
statement, 30 seconds, just take maybe half a minute, and, 
Fred, if you would like to just lead it off, just half a 
minute, something you would like to leave us with, please?
    Mr. Rolando. Yes, I want to leave you with one of the last 
points that was raised because I think it is an important point 
with an important response with regard to the comparability in 
the private versus Federal. I would really be interested in 
looking at that data and sending you a response because I think 
it is really important to look at apples and apples in there, 
because it is really easy to look at apples and oranges when 
you are making a comparison like that. And I would hate to 
leave that in the record, as was just said.
    Chairman Carper. All right. Thank you. Mr. Hegarty.
    Mr. Hegarty. I would say that, as in my testimony, the cuts 
that the Postal Service has made so far have basically hit rock 
bottom. We have lost 300,000 good middle-class-paying jobs. 
Approximately 25 to 40 percent, depending on category of Postal 
employees, are veterans. We are losing the opportunities for 
our returning vets to come back and get a good job with the 
Post Office like their brethren in years past have done. In the 
plants, we have cut from over 600 plants, as you stated, Mr. 
Chairman, to somewhere in the neighborhood of 350, 375 right 
now.
    I am worried that further cuts will erode the business 
model and not allow the Postal Service to grow and to compete 
for the business that is out there, and I think it is a cutting 
mode that should be construed as a death spiral for the Postal 
Service.
    Chairman Carper. Good. Thanks.
    Mr. Rapoza, a closing word.
    Mr. Rapoza. Senator Carper, I want to thank you and the 
Committee for having this hearing, and I think the sooner we 
get some postal reform, the more pressure will be released out 
in the field, not only with staffing but vehicle needs and 
other essentials out there that we need to provide the service 
to the American public. So, I would urge you to try to get it 
done before I leave on December 31.
    Chairman Carper. Yes, sir, that is our goal. [Laughter.]
    That is our goal. And then we can name the bill after you, 
maybe. You never know.
    All right. Dr. Holtz-Eakin.
    Mr. Holtz-Eakin. Mr. Chairman, I am pleased to see the 
Senate working on real problems in a bipartisan fashion, and I 
think it is a wonderful precedent for much of the rest of our 
government.
    On this, I think the thing that I would urge you to 
remember is that this is not a private sector entity. I am all 
for giving the Post Office all the tools they need to be 
successful in the lines of business that the Congress decides 
they should pursue. But they are ultimately backed by the U.S. 
taxpayer, and due protection to that exposure is really 
important in this.
    Chairman Carper. All right. Thank you.
    Dr. Baker, please.
    Mr. Baker. I guess I would just make three quick points.
    First off, again, looking at the numbers, having not looked 
at them for a couple years, I am impressed to see the progress 
the Postal Service has made in restoring itself to 
profitability.
    Second, I am pleased to see the bipartisan interest in 
considering at least the possibility of a diversified portfolio 
for the retirement funds, because I think that is---again, if 
we want to emulate a private business, that is what you would 
do.
    And, last, I hope I get you to consider letting Postal 
workers get their health care in Canada. [Laughter.]
    Chairman Carper. Let me give the benediction, if I can. The 
Postal Service announced this week an exigent rate case, and I 
think they are looking at an increase of as much as 5.9 percent 
and on an emergency basis. There are about 90 days before us 
until I think that could kick in. And I think the Board of 
Governors said upon announcing the exigent rate, they would be 
happy not to see that take place. I think I speak for most of 
us on this side of the dais that we would be happy to see that 
not take place either.
    Part of the key, a good part of the secret to making sure 
that it does not take place, is for us to legislate wisely. We 
need good input. We have gotten some good input here today. And 
I know there have been serious negotiations between our labor 
unions, our friends who represent Postal employees, many of 
them, and Postal management. If there is a true interest on the 
part of our friends in organized labor to be able to preserve 
6-day-a-week service, I do not know if there is some way that 
you can negotiate a compensation package maybe for the folks 
that are delivering on that sixth day that makes this 
competitive, to do it, and to not do it at a loss.
    I know you all have tried to do that before, and I would 
just ask that you look at that again as you go forward. And I 
know there is good spirit involved in those negotiations, and I 
would just urge you to keep at it.
    The last statement: I have said before, the situation at 
the Postal Service is dire. It is not hopeless. There is hope 
in a hopeless world. And if we have some opportunities here to 
seize, then I think our goal, my goal is that we ought to seize 
those opportunities, seize the day. If we work together and 
work smart, the future of the Postal Service for the next 
couple hundred years can be almost as bright as it has been for 
the last couple hundred years.
    Again, our thanks to everybody for being here, my 
colleagues who have joined us today, Senator Johnson who stayed 
to the not-so-bitter end. And I would say because he has, he 
will hear this before our other colleagues do: That the hearing 
record will remain open for 6 days--I think that is until 
October 4--for the submission of statements and questions for 
the record.
    And with that, the hearing is adjourned, and lunch is 
served somewhere for each of us. Thank you so much.
    [Whereupon, at 12:57 p.m., the Committee was adjourned.]


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